Teesside Pension Fund
Annual Report and Accounts for the year ended
31 March 2015 Index
Report of those charged with Governance ...... 3 Membership ...... 24 Head of Investments' Report ...... 31 Financial Statements ...... 41 Auditor's Report ...... 42 Statement of Responsibilities for the Financial Statements .... 44 Fund Account and Net Assets Statement ...... 45 Notes to the Financial Statements ...... 47 Actuary’s Statement ...... 70 The Compliance Statement ...... 72 Summary of LGPS Benefits ...... 76 Contacts and further information ...... 79
2 Report of those charged with Governance Chairman’s Introduction
During the last twelve months, equity and bond markets performed strongly again, with some indices finishing the year at all-time highs. Equity markets were volatile again as investors dealt with the US ending their quantitative easing (QE) programme and market rumours abound of increasing interest rates, the European Central Bank embarking on a full programme of QE following Greek elections, the Swiss discontinuing their currency peg to the Euro, and Japan resuming their QE programme.
Strength in bond markets continued with some Governments, such as Switzerland, able to issue bonds with negative interest rate. In other words, you pay them for owning their bond. The divergence in monetary policies between the US, looking to tighten monetary policy and raise interest rates, and the Eurozone and Japan, loosening monetary policy through QE also caused the US Dollar to strengthen against other major currencies.
The other big financial story of the year was the rapid demise of the oil price. The price of Brent Crude fell from over $100 a barrel to $55 at 31 March 2015.
The financial performance of the Fund for the year to 31 March 2015 was positive. The Fund’s value rose to £3,244 million, an increase over the year of £195 million. The rise was due to strong equity and property markets.
The membership of the Fund continues to increase, with total membership at the year end now standing at 68,054, an increase of 1,528 over last year. The number of active members has decreased by 1,168 (4.9%) over the year, and decreased by 9.1% over the past five years. The number of pensioners increased by 411 (2.0%) over the year, and increased by 20.8% over the past five years. The number of deferred members increased last year by 2,285 (10.3%), and increased by 41% over the past five years.
Where a member retires early there is a cost to the Fund arising from the fact that Contributions are no longer being received for the member, and a Pension is drawn earlier than the Actuary had assumed. It is the policy of the Fund to recharge the actuarial cost of these retirements to the employers. This policy has the advantage that the Fund recovers the cost of an early retirement at the outset. For the employer the advantages are twofold;
1 the impact of retirement decisions is transparent; and 2 the cost is invoiced separately rather than being recovered in the employers Contribution Rate, which was once the case.
In this financial year the Fund received over £5.5 million from these early retirement recharges, up on last year figure of £4.8 million, a 13.7% increase on last year.
Every three years the Fund actuary, AON Hewitt, carries out a full actuarial valuation of the Fund. The purpose of this is to calculate how much employers in the scheme need to contribute going forward to ensure that the Fund’s liabilities, the pensions due to current and future pensioners, will be covered. Unlike most other Public Sector schemes the Local Government Scheme is a funded scheme. That means there is a pool of investments producing income which meet a significant part of the liabilities. The actuary calculates to what extent the Fund’s assets meet its liabilities. This is presented as a Funding Level. The aim of the fund is to be 100% funded, and at the last valuation the actuary was able to declare a funding level of 100%. This allowed many of the employers in the Fund to decrease the amount of their contribution for the next three years, releasing money for front-line services . The next valuation is due to be carried out in March 2016.
3
Nature of the Scheme
The Teesside Pension Fund (the Fund) is part of the Local Government Pension Scheme. From April 2014 the scheme is governed by: • The Local Government Pension Scheme Regulations 2013 (as amended); and • The Local Government Pension Scheme (Transitional Provisions, Savings and Amendment) Regulations 2014. These regulations replaced the Local Government Pension Scheme (Benefits, Membership and Contributions) Regulations 2007 and the Local Government Pension Scheme (Administration) Regulations 2008. Full details of the changes to the Scheme, along with updated scheme guides, are on our website at: www.teespen.org.uk . The Regulations specify the pensions and other benefits payable and fix the rates of member contributions. Employer contributions are set every three years by the Fund Actuary. The purpose of the Fund is to provide retirement benefits for local authority employees in the Teesside area and other bodies admitted by agreement. The Fund is administered by Middlesbrough Council on behalf of all participating employers. A full list of participating organisations is given in the Membership section below.
The Fund is financed by way of contributions from employers and employees, based upon a percentage of pensionable pay, and supplemented by earnings from Fund investments. The surplus funds, after payment of benefits, are invested by an Investment Panel. The Panel comprises elected members of Middlesbrough Council, representatives of the other unitary authorities, the Trade Unions and the Fund's Investment Advisers.
Management of the Fund
The Fund is administered by Middlesbrough Council via the Teesside Pension Fund Pensions and Investment Panel which has plenary powers to make decisions without reference to the Council. This panel acts in a similar manner to the Board of Trustees of a private sector pension fund.
The day to day running of the Teesside Pension Fund is delegated to the Chief Financ e Officer of Middlesbrough Council who is responsible for implementing the strategies and policies set by the Pensions and Investment Panel. Supporting him is a team of staff split into two units. The Pensions Administration Unit is responsible for the calculation and payment of pension benefits and for looking after employer interests in the Fund. The Loans and Investment Unit manages the investment of the Fund in conjunction with the advice of the Fund’s external Investment Advisors.
4 The Teesside Pension Fund Pensions and Investment Panel
Panel membership and meeting attendance during the year 2014/15
Members With voting rights 18 Jun 17 Sep 10 Dec 11 Mar
Chair Councillor SE Bloundele
Vice Chair Councillor J Rostron
Middlesbrough Council Councillor R Brady
Councillor JG Cole
Councillor J Hobson
Councillor N Hussain
Councillor G Purvis
Councillor P Sharrocks
Redcar & Cleveland BC Councillor V Jeffries
Stockton BC Councillor J Beall
Hartlepool BC Councillor P Jackson
Other Employers Mr P Fleck
Without voting rights
Trades Unions Unison, GMB and ACTS
The current Panel consists of representatives from all the district councils in the former Cleveland County area as well as representatives from the Trade Unions. The Panel held 4 quarterly meetings during the year.
The size and political make-up of the Panel is determined annually by Middlesbrough Council, and the Councillors are then nominated by each political party. Representatives of the other district Councils are nominated by them. The ‘Other Employers’ representative, is chosen by election by the admitted bodies of the Fund.
Terms of Reference – Teesside Pension Fund & Investment Panel
Terms of Reference
1. For Members of the Council to act as Trustees of the Fund.
2. To have delegated powers to manage the investments of the Fund within the requirements of the Local Government Pension Scheme Regulation as amended from time to time.
3. To manage the Fund in accordance with the Management Agreement:
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(i) To ensure that the Fund complies with the Local Government Pension Scheme Regulations 1997 (as amended), the Inland Revenue requirements for Pension Funds and any other relevant statutory provision.
(ii) The selection, appointment and dismissal of investment managers, scheme administrators, independent advisors and ad hoc advisors.
(iii) The formulation of investment strategy and risks strategy for the Fund under its stewardship, after receiving advice from its independent advisors and the Loans and Investment Manager.
(iv) Setting investments targets and monitoring the investment performance and financial control of the Funds’ assets and commissioning the preparation of actuarial valuations and accounts.
(v) Ensuring that value for money is achieved from all the specialists supplying services to the Fund through a competitive and qualitative selection process and through budgetary control.
(vi) Commissioning any actuarial valuation and taking appropriate action in the light thereof.
(vii) Receiving and agreeing the annual report and accounts.
(viii) Ensuring effective communication with scheme members and pensioners.
(ix) Receiving and dealing with general complaints from scheme members and pensioners.
(x) To determine the exercise of the discretions allowed to the administering authority, as laid down in the Local Government Pension Scheme Regulations 1997.
(xii) Any other responsibilities delegated to it by the Authority.
(xii) To submit an annual report to Council.
6 Fund Administrators and Advisors
Administration Chief Finance Officer Mr Paul Slocombe Head of Investments Mr. Paul Campbell Pensions Administration Manager Mr Mike Hopwood Solicitor to the Fund Mr Bryn Roberts
Advisors to the Fund Actuary Aon Hewitt Limited Solicitors Nabarro LLP & Freeth Cartwright LLP Auditor Deloitte LLP Investment Advisors Mr Peter Moon Mr Fred Green Property Managers CBRE Custodian BNP Paribas Securities Services AVC Providers Prudential Assurance, Phoenix Life Bankers The Co-Operative Bank Plc
The Pensions Landscape
All of the major public sector schemes change radically from April 2015, with new public sector schemes established and operated in accordance with the Public Service Pensions Act 2013. However, due to its unique ‘funded’ status amongst these schemes, the LGPS changed a year earlier, avoiding increases to contribution rates ahead of April 2015 which the other schemes imposed. More detail on the changes to the scheme is contained in the “Scheme specific changes” section.
Government changes to the wider pensions’ landscape are also introduced from April 2015, promoting “Freedom and choice” whereby people will have greater flexibility in how and when they access their pension savings. These changes announced will largely impact upon defined contribution schemes and, due to the nature of the LGPS, should not have major impact upon the scheme or its operation.
The overall limits on tax relief available for pension saving have reduced further, with the annual allowance figure now set at £40,000 and the lifetime allowance reducing to £1m in 2016. The lifetime allowance limit is only breached by a very small proportion of LGPS membership, but the reduction to the annual allowance will mean that more members could face a potential tax charge in the future.
Scheme specific changes On 1 April 2014 the new look LGPS came into force, reflecting the changes required to public sector schemes derived from the Public Service Pension Commission recommendations.
7 From 1 April 2014;
• The LGPS became a Career Average Revalued Earnings (CARE) scheme using CPI as the revaluation factor (the previous scheme was a final salary scheme) • The scheme accrual rate is 1/49 th , where the previous scheme was 1/60 th • There is no fixed scheme pension age, instead each member's Normal Pension Age (NPA) is their State Pension Age, with a minimum of 65 (the former scheme had a fixed pension age of 65) • Average member contributions to the scheme remain at 6.5% with the rate determined on actual pay (previously, part-time contribution rates were based on full time equivalent pay). While there is no change to average member contributions, the lowest paid pays the same or less and the highest paid pays higher contributions on a more progressive scale after tax relief • There is a facility for members considering opting out of the scheme to instead elect to pay half contributions for half the pension. This is known as the 50/50 option (earlier schemes had no such option) • Members’ benefits for service prior to 1 April are protected, including remaining ‘Rule of 85' protection. Protected past service continues to be based on final salary and age 65 NPA
All existing members of the previous scheme (the 2008 scheme) automatically became members of the 2014 scheme where their employment continued beyond 31 March 2014. A summary of the 2014 scheme provisions and a comparison to the 2008 scheme is highlighted in section Summary of LGPS benefits.
Promoting Scheme Membership
The focus on promoting scheme membership has largely been carried out through employer education this year. We have been sending regular communications and facilitating employer training events as much as possible.
The national workplace pension reform initiative, known as Auto Enrolment, is well underway with each employer having its own, ‘Staging Date’. This meant that employers are getting a lot more involved with pensions now – and whilst the majority of employers are relishing the new challenges, there is a lot to learn.
The staging date is the date that every employer in the country has to automatically enrol eligible employees into a registered pension scheme. By educating employers about the scheme, this gives them the knowledge to confidently engage with their staff during the auto enrolment process.
The scheme structure has also been amended to accommodate more people by introducing a 50/50 option. The idea behind this is to try and retain those members who may want to opt out of the scheme, by providing an option where a member can temporarily halve their contributions to the scheme rather than opt out completely. This was communicated via our Outlook newsletter which is distributed to every active scheme member.
An important element which we make our members aware of are the companies that offer cash in pension scheme benefits by transferring them from the safety of the LGPS to a private/overseas pensions arrangement. The Pension Regulator has issued guidance on this and we have adopted this into our communications to members.
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Risk management
The Statement of Investment Principles 2015 sets out the approach of the Fund in identifying, mitigating and managing risk. Risk There are three forms of risk: a) that associated with security of the Fund’s assets; b) that associated with loss of value relating to those assets; c) that associated with the ability of those assets to provide required rates of return. a) Security of the Fund’s Assets
The Fund’s Custodian, BNP Paribas, holds the majority of the Fund’s Assets. An agreement is in place protecting the Fund against fraudulent loss and regular checks are made by independent auditors regarding the integrity of the Custodian’s systems. In addition the Fund’s Direct Property assets are registered in the name of Middlesbrough Council and the Title Deeds and documents held by the Fund’s solicitors, Freeth Cartwright. Cash balances belonging to the Fund are invested in accordance with agreed criteria, which take into account an appreciation of risk. b) Asset Risk
The value of all investments can go down as well as up. Even investments in Gilts, securities issued by HM Government, are not without risk. Individual companies can cease to trade, with shareholders well down the list of creditors.
The best way to protect the Fund against asset risk is by diversifying into a number of asset classes, a range of countries and a range of companies. The Local Government Pension Scheme (LGPS) Regulations 1986 imposed certain limits on the proportion of the value of the Fund which could be invested in different types of investment. The LGPS (Management and Investment of Funds) Regulations 1998, revised in 2004, 2009 and 2013, sets out these limits, subject to certain conditions being met. The Investment Panel on 11 March 2004 decided that advantage should not be taken of the increased flexibility provided by the changes. c) Investment Risk
One of the Trustees’ most important duties is to make sure that the Fund has enough Assets to pay the benefits already earned by scheme members. On top of that they are looking to achieve sufficient return on those Assets to keep down the cost of building up future benefits. In order to meet these responsibilities the Trustees set a performance benchmark against which they can measure the progress of the Fund’s investments. Funds which outperform their benchmark can reduce costs compared with those which under-perform. For the Fund to significantly out-perform its benchmark it needs to have an asset mix which is different from that of its benchmark. The more out-performance is required the greater the differences will need to be. In other words out-performance cannot be achieved without taking risks. Measurement of risk can identify whether the risk profile is, on one hand, large enough to deliver the required relative returns or alternatively so great as to lead to the possibility of serious underperformance.
The Teesside Pension Fund, as at 31 March 2015, has an asset mix, which varies significantly from that of the average fund, as measured by WM Company.
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The Fund asset mix % may vary slightly from the statutory accounts due to internal classification differences .
Fu nd % Average % UK Equities 37 21 Overseas Equities 47 40* Bonds 5 17 Property 6 8 Cash 3 3 Alternatives 2 11** Total 100 100
* includes Global Equity Investments Funds (incl. UK) ** includes Pooled Multi-Asset Funds
The result of holding an asset mix, which differs significantly from that of the average, is that investment performance returns can be volatile compared with those achieved by the average fund. This could result in periods of underperformance.
The Asset/Liability Study, carried out every three years by the Fund Actuary in conjunction with the Fund’s Investment Advisors, assesses the degree of risk which the Fund needs to incorporate into its investment strategy, mainly expressed as the split between bonds and equities, in order to meets its liabilities and in particular to achieve the goal of employer contribution rates which are both low and stable. Financial Performance Report
Income, Expenditure and Fund value The Funds Financial Statements show that the net assets of the Scheme have increased by 6 % compared to the previous year and by 37 % over the last 5 years from the 2010 value of £ 2,371 million.
10 Finance Performance Report Re-stated 2010/11 2011/12 2012/13 2013/14 2014/15 £000 £000 £000 £000 £000 Fund Value at the start of the year 2,371,622 2,586,495 2,596,664 2,929,601 3,049,227
Income 183,264 184,988 182,219 210,051 186,072 Expenditure (114,705) (109,841) (113,604) (121,358) (206,109) Change in Market Value of Investments 146,314 (64,978) 264,322 30,933 214,604
Increase in Fund during the year 214,873 10,169 332,937 119,626 194,567
Fund Value at the end of the year 2,586,495 2,596,664 2,929,601 3,049,227 3,243,794
Change in Fund Value % 9% 0% 13% 4% 6%
Financial Highlights £000 £000 £000 £000 £000 Pensions Paid 70,532 77,256 83,943 89,648 94,860 Administration Costs * 1,479 1,531 1,565 1,579 1,599 Investment Management Costs 1,253 1,222 1,367 2,717 2,779 Oversight and Governance Costs 247 230 Membership 2011 2012 2013 2014 2015 No No No No No Active 24,341 23,856 23,908 23,734 22,566 Deferred 18,609 19,717 20,738 22,144 24,429 Pensioner 18,438 19,389 19,850 20,648 21,059
Total 61,388 62,962 64,496 66,526 68,054
Fund Averages £ £ £ £ £ Fund value per member 42,134 41,242 45,423 45,835 47,665
Average Pension Paid 3,825 3,985 4,229 4,342 4,504
Investment management expenses cost per member 68 68
Administration Cost per member 24 24 24 24 23
Investment Management cost per member 20 19 21 41 41
* Excluding Actuarial , Legal and Audit costs
Note
Administration costs, Investment management costs, oversight and Governance costs have changed since prior year due to change in the management cost presentation as required by CIPFA guidance.
11 Analytical review of the financial year
The financial performance of pension funds can vary significantly year on year - the total fund value can undergo large movements resulting from the change in the market value of investments, and within the fund account the ‘net additions (withdrawals) from dealings with members’ can vary due to external factors affecting the fund itself or the principal employers within it.
The significant impact of, unforeseeable and unquantifiable, external factors have resulted in the policy of the administering authority not to set a budget for future periods for Teesside Pension Fund. It was felt that any budget would contain too many unknowable variables to be of any practical use and analysis of budget variances would contain inaccurate assumptions.
For this reason, it was felt that a much more meaningful analysis of the financial performance of the Fund could be gained from comparison with the performance in the previous year and the principal variances and movements in the financial performance of the fund in comparison with the previous year were as follows;
Summary of Analytical Review 2014/15 Restated Fund Account Notes 2014/15 2013/14 Change £ ' 000 £ ' 000 Contributions and Other Income Employers Normal and Deficit recovery 1 58,984 62,882 -6% Employers Additional 2 48 550 -91% Employees Normal 3 25,488 25,418 0% Transfers in 4 5,243 31,070 -83% Capital Costs of Early Retirements 5 5,528 4,864 14% Other Income 1,228 1,222 0% Total Income 96,519 126,006 -23%
Benefits and Other Expenditure Benefits 6 94,860 89,648 6% Benefits - Basic Lump Sum 7 23,701 18,683 27% Benefits - Lump Sums on Death 2,185 2,786 -22% Individual & Bulk Transfers to other Schemes 8 80,635 5,683 1319% Administrative Expenses 9 1,599 1,579 1% Investment Management Expenses 10 2,779 2,717 2% Oversight and Governance Costs 11 230 247 -7% Other Expenditure 12 120 15 700% Total Expenditure 206,109 121,358 70%
Return on Investments Dividends 13 79,701 76,146 5% Rents 14 9,317 7,035 32% Interest 15 535 864 -38% Profit on Sale of Investments 62,088 49,199 26% Unrealised (loss)/gain on Revaluation 152,516 (18,266) 935% Total Return on Investments 304,157 114,978 165% Net Increase in the Fund in the Year 194,567 119,626 63%
12 Note
The analytical review of Administration expenses, Investment management expenses and oversight and Governance costs shows changes in the presentation of those costs as required by CIPFA guidance.
Explanation of variances (k= £’000)
2014/15 2013/14 Employers Normal Contributions & Deficit 1 contributions - £'000 58,984 62,882 Fall of 6%
Pensionable pay of the 8 largest employers decreased in the year by 1%. The reduction in additional deficit recovery payments from a number of employers and the general reduction in normal contribution rates, as a result of the 2013 valuation has contributed to the overall fall of 6% in the year.
2014/15 2013/14 2 Employers Additional Contributions - £'000 48 550 Fall of 91%
In 2014/15 there were a number of employers which paid additional contributions. In 2013/14, Ofsted made a special one off contribution of £550k.
2014/15 2013/14 3 Employees Normal Contributions - £'000 25,488 25,418 No Change
Despite active membership reducing by 4.9% in 2014/15, total employee contributions remain constant, mainly resulting from the new scheme changes. The automatic enrolment process and the ability for employees to pay 50% contributions has had a positive effect in the year.
2014/15 2013/14 4 Transfers In - £'000 5,243 31,070 Fall of 83%
In 2014/15, 96 transfers were received into the Scheme at an average value of £ 54.5k, compared to 118 transfers at an average value of £28k in 2013/14. In 2013/14, there was an additional large bulk transfer in accrual made regarding Durham Tees Valley Probation (£27.8 mill).
2014/15 2013/14 5 Capital Cost of Early Retirements - £'000 5,528 4,864 Increase of 14%
The number of early retirements has levelled this year, with the overall average cost also remaining unchanged. Note, the early retirement figures relate to those made in the year and the balancing figure relates to retirements made in previous years but are being charged over a five year period.
Number Total Cost Average
2014/15 226 £4,901,779 £21,689
2013/14 229 £4,863,641 £21,239
13 The retirements from the Councils processed by the year end were as follows:
Number Total Cost Average Hartlepool BC 18 £580,999 £32,278 Middlesbrough BC 70 £1,771,236 £25,303 Stockton BC 38 £695,359 £18,299 Redcar & Cleveland BC 12 £294,913 £24,576 Total 138 £3,342,507 £24,221
2014/15 2013/14 6 Benefits - £'0 00 94,860 89,648 Increase of 6% ` Total cost has increased by 6% which in part is accounted for by the 2.7% Pensions Increase. 868 new pensioners retired in the year (2013/14 1,047) to whom pensions of £5.2 million were paid (2013/14 £4.0 million).
2014/15 2013/14 7 Benefits - Basic Lump Sum - £'000 23,701 18,683 Increase of 27%
There has been an increase in the value of Lump Sums paid by 27% in the year with the number of recipients increasing to 1,049 (2013/14 1,021).
2014/15 2013/14 Individual Transfers to Other Schemes - £'000 8 80,635 5,683 Increase of 1,319%
Transfers out can vary markedly year on year depending on both numbers and the type of people transferring. For 2014/15, £75.1 million relates to the group transfer out of Durham Tees Valley Probation to Greater Manchester Pension Fund. Taking this out of the equation, individual transfers out are £5,486k, which is a reduction in the year of 3.5%, and the number of transfers out are 85 in 2014/15 (2013/14 98). In taking out the bulk transfer out, the average value has increased by 11% to £64,534 (2013/14 £57,987).
Number Total Cost Average
2014/15 85 £5,485,357 £64,534
2013/14 98 £5,682,749 £57,987
2014/15 2013/14 9 Admini strative Expenses - £'000 1,599 1,579 Increase of 1%
There has been a slight increase of 1% in the year, in line with average rate of inflation for the year. 2013/14 figures have been re-stated as a result of the new CIPFA guidance on accounting for management expenses. Re-stated 2014/15 2013/14 10 'Investment Management Expenses - £'000 2,779 2,717 Increase of 2%
There has been a marginal increase of 2% in the year. Both 2014/15 and 2013/14 figures include transaction costs that were previously included in the cost of assets, as per the new CIPFA guidance on accounting for management expenses.
14 2014/15 2013/14 11 Oversight and Governance Costs - £'000 230 247 Fall of 7%
There has been a fall of 7% in the year. This is a new category of cost for 2014/15 and 2013/14 has been re-stated to show these figures, which have been included as a result of the new CIPFA guidance on accounting for management expenses.
2014/15 2013/14 12 Other Expenditure - £'000 120 15 Increase of 700%
There has been a significant increase in other expenditure in the year as a result of increased refunds to leaving members.
2014/15 2013/14 13 Dividend Income - £'000 79,701 76,146 Increase of 5%
Overall Dividend Income has risen by almost £3.6 million (2013/14 £3.6 million) which is due to increased income from equity investments offset against a reduction in income from pooled investments, fixed interest securities and index linked securities.
2014/15 2013/14 14 Rent - £'000 9,317 7,035 Increase of 32%
At the year-end 2014/15,the Fund owns 33 properties on which the net income earned has increased by £2.2 million in the year. The rise in rental income is mainly due to purchase of three significant valued properties and generally, as a result of upward rent reviews, reduction in incentives for tenants when the introductory period has expired and an improvement in leasing properties in the commercial housing market.
2014/15 2013/14 15 Interest - £'000 535 864 Fall of 38%
A higher level of average cash on deposit in 2014/15 and a constant low interest rate produced a lower return of interest compared to the previous year.
2014/15 2013/14 16 Investments - £'000 3,132,186 2,856,505 Increase of 10%
There has been an increase in Investment values reflecting the improving position in the World's Equity markets during 2014/15. The Fund has approximately 80% of its assets invested in equities.
2014/15 2013/14 17 Cash - £'000 81,158 135,697 Fall of 40%
The fall in investment cash balances is due to a lower level of funds placed on short term deposit. At the year-end £73.8 million was on a short term deposit compared to £132.2 million at 31/03/2014.
15 Cashflow Statements for the year ended 31 March 2015 £000 Cashflow from Operating Activities Cash received for Contributions 84,694 Cash received for Early Retirements 2,885 Cash Received from Transfers In 33,043 Cash Received from Investments 88,245 Cash Received from Sales of Investments 62,088 Cash from Other Income 1,228
Total Cash Received 272,183
Cash paid for Benefits 120,746 Cash paid for Transfers Out 80,755 Cash paid for Management Expenses 2,040
Total Cash Paid 203,541
Net Cash Inflow from Operating Activities 68,642
Application of Cash Net Purchase of Investments 123,162 Increase in Cash with Custodian 3,858 Reduction in Cash on Deposit (58,397) Increase in Cash at Bank 120 Decrease in Other Debtor Balances (235) Decrease in Other Creditor Balances 134
68,642
16 The net annual cash flow of the Fund has, to date, always been positive and the realised profit and losses on the sale of investments can have a very significant impact in any one year.
Asset Allocation Strategy
The Funding Strategy Statement sets out the Investment Strategy of the Fund. This strategy is set for the long term and is reviewed every 3 years as part of the Fund’s Asset/Liability study to ensure that it remains appropriate to the Fund’s liability profile. As part of the strategy the Administering Authority has adopted a strategic benchmark representing the mix of assets best able to meet the long term liabilities of the Fund. As at 31 March 2015 the actual assets compared to the benchmark as follows;
Fund Assets % Benchmark % Fund Assets % 31.03.2015 31.03.2014 UK Equities 37 30 39 Overseas Equities 47 40 42 Bonds & Cash 8 15 11 Property 6 10 6 Alternatives 2 5 2
The Fund asset mix % varies slightly from the statutory accounts due to internal classification differences.
Amounts due to the Fund from Employers 2014/15 2013/14 £ ' 000 £ ' 000
Current Assets Contributions in Respect of Employers 4,851 5,067 Contributions in Respect of Members 2,079 2,038 Amounts due in respect of early retirements 2,229 2,428
Debtors due over 1 year Amounts due in respect of early retirements 299 935
9,458 10,468
The Contributions due are in respect of March 2015 and were received in April 2015.
Early Retirement costs
Scheduled Bodies have the option to spread early retirement costs over 5 years. The debts due over 1 year are the amounts which are receivable from 2015/16 onwards .
17 Payment of Contributions to the Fund
Employers are required to pay employers and employees contributions to the Fund within 19 days of the end of the month to which they relate. The payment of contributions is monitored for timeliness and accuracy of payment.
Analysis of Contributions received
Total number of Contribution payments received 1,543
Number received late 6
Details of late receipts
Fleet Factors
Two payments were received late. One in June, received on 27 th July 2014 and one in October, received on 2 nd December 2014. All other payments were received on time. No reason was provided as to the reason why the payments were late.
Creative Management Services Ltd
This is a new admitted body to the scheme. They were due to start paying contributions in December 2014. All payments from December 2014 to March 2015 were received late. No explanation has been provided.
Because the incidence of late payment of contributions is so low the Fund has not exercised its option to levy interest on overdue contributions .
18 Analysis of Contribution rates and amounts received 2014-15
2014/15 Employers Employees Employers Rate % * £ £ 000’s 000’s All Saints Academy 14.60 21 52 Ashtree Academy 14.60 21 53 Beamish Museum Ltd 13.30 139 296 Billingham Town Council 14.10 5 11 Brambles Academy 14.60 14 33 Business and Enterprise NE 9.70 10 66 Caldicotes Primary Academy 14.60 8 21 Capita Managed IT Solutions 13.00 10 22 Care Quality Commission 17.00 1,704 3,842 Carillion AM Ltd 19.10 22 71 Carillion JM Ltd 16.60 14 41 Catcote Academy 14.60 72 179 Chandlers Ridge Academy 14.60 10 26 Cleveland College of Art & Design 13.60 96 210 Cleveland Fire Brigade 14.00 208 469 Cleveland Fire Support Network 14.00 3 5 Cleveland Police 12.60 99 185 Coast and Country Housing 16.40 711 1,759 Community Integrated Care 21.00 3 10 Conyers School 14.60 67 153 Creative Management Services 15.10 7 19 Diocese of Middlesbrough Trustee 25.60 6 16 Dormanstown Primary Academy 14.60 22 55 Durham Tees Valley Airport Limited 21.20 82 238 Durham Tees Valley Probation Trust 19.20 150 438 Dyke House Academy 14.60 76 179 Easterside Academy 14.60 20 52 Ecocleen Services Ltd 15.00 0 0 English Martyrs Educational Trust 14.60 56 138 Erimus Housing 17.90 273 759 Eskdale Academy 14.60 15 38 Eston Park Academy 14.60 15 36 Extol Academy (Eldon) 14.60 19 49 Fabrick Housing Group Ltd 15.30 93 192 Fleet Factors Ltd 20.40 1 4 Fleet Factors RCBC 20.50 2 5 Forward Swindon Ltd 19.20 18 44 Four Children 13.40 4 9 Frederick Nattrass Primary Academy 14.60 16 41 Freebrough Academy 14.60 49 117 Future Regeneration of Grangetown 18.30 2 5
19 Gillbrook Academy 14.60 7 18 Grangefield Academy 14.60 49 119 Green Lane Primary Academy 14.60 27 70 Guisborough Town Council 14.10 4 10 Hardwick Green Primary Academy 14.60 12 30 Harrowgate Primary Academy 14.60 18 46 Hartlepool BC 14.20 2,982 6,581 Hartlepool College of FE 13.60 163 361 Hartlepool 6th Form College 13.60 61 84 Hemlington Hall Academy 14.60 16 41 Hillsview Academy 14.60 24 59 Horizons Specialist Academy Trust 14.60 132 323 Housing Hartlepool 14.80 440 959 Ian Ramsey C of E Academy 14.60 16 38 Ingleby Barwick Town Council 14.10 2 5 Ingleby Manor Free School & 6 th Form 14.60 4 10 Kader Academy 14.60 11 28 KGB Cleaning & Support Services Ltd 15.00 1 3 Kings Academy 14.60 74 177 KTS Academy 14.60 45 112 Liberata UK Ltd 0 47 0 Lockwood Parish Council 14.10 1 2 Loftus Town Council 14.10 1 3 Macmillan Academy 14.60 75 177 Manor Community Academy 14.60 7 16 Mellors Catering Ltd Dormanstown 15.10 1 3 Mellors Catering Ltd Eston 15.10 15 20 Mellors Catering Ltd Central 15.10 14 37 Mellors Catering Ltd Normanby 15.00 2 7 McAlpine Govt Services Ltd 20.00 15 20 Middlesbrough College 13.60 407 865 Middlesbrough Council 14.40 3,733 8,612 Mouchel 14.40 327 714 Normanby Primary School 14.60 17 44 North Ormesby Primary Academy 14.60 12 30 North Shore Academy 14.60 39 92 Norton Primary Academy 14.60 24 63 Nunthorpe Academy 14.60 79 181 Nunthorpe Primary Academy 14.60 9 22 Oak Tree Primary Academy 14.60 26 65 Oakfields Community College 15.40 6 16 OCS Ltd 14.90 1 2 Ofsted 26.70 2 309 One Awards Ltd 13.60 43 90 One IT Services & Solutions Ltd 14.20 34 73 Ormesby School 14.60 55 133 Our Lady & St Bede Catholic Academy 14.60 10 24
20 Outwood Academy Acklam 14.60 46 114 Outwood Academy Bydales 14.60 5 11 Pennyman Primary Academy 14.60 30 74 Prior Pursglove College 13.60 68 151 Police & Crime Commissioner for Cleveland 12.60 48 74 Redcar Academy 14.60 35 83 Redcar & Cleveland BC 15.10 3,047 7,862 Redcar & Cleveland College 13.60 88 193 Rosewood Academy 14.60 18 47 Saltburn Marske & New Marske Parish Council 14.10 3 6 Skelton and Brotton Parish Council 14.10 3 6 Skelton Primary School 14.60 29 71 SLM Community Leisure Charitable Trust 16.60 48 133 SLM Fitness & Health Ltd 16.60 6 16 SLM Food & Beverage Ltd 16.60 2 6 St Bede’s Catholic Academy 14.60 15 37 St Bede’s Primary Catholic Voluntary Academy 14.60 6 14 St Gabriel’s Catholic Voluntary Primary Academy 14.60 9 22 St Gregory’s RC Academy 14.60 16 41 St Joseph’s Primary Catholic Voluntary Academy 14.60 5 13 St Margaret Clitherow’s Catholic Voluntary Primary Academy 14.60 14 36 St Mary’s Catholic Voluntary Primary Academy 14.60 11 27 St Michael’s Catholic Academy 14.60 25 64 St Paulinus Primary Catholic Voluntary Academy 14.60 6 14 St Peter’s Catholic Voluntary Academy of Maths & Computing 14.60 30 71 Stagecoach Transit 23.20 21 241 Steria Ltd 12.60 578 1,123 Stockton BC 14.30 4,863 10,826 Stockton Riverside College 13.60 163 348 Stockton 6th Form College 13.60 21 47 Stranton Academy Trust Stranton 14.60 23 56 Sunnyside Academy 14.60 38 97 Tascor Services Ltd – Custody 16.40 18 47 Tascor Services Ltd - PFI 16.40 2 7 Taylor Shaw – Holy Rosary 15.00 1 3 Taylor Shaw – Riverdale 15.00 1 3 Taylor Shaw – St Peters 15.00 2 6 Tees Active Ltd 13.10 140 290 Teesside University 13.30 1,714 3,650 The Big Life Company Ltd 14.50 3 10 The Chief Constable for Cleveland 12.60 452 850
21 Thornaby Academy 14.60 40 93 Tristar Homes Ltd 14.80 448 1,264 Unity City Academy 14.60 53 128 Viewley Hill Academy Trust 14.60 13 34 West View Primary School & Sports Academy 14.60 9 22 West Park Primary School 14.60 1 3 Wolseley UK Ltd 22.00 3 62 Yarm Primary School 14.60 20 50 Yarm Town Council 14.10 2 4
Note: net rate of contribution payable by each employing Organisation for the period 1 April 2014 to 31 March 2015 under regulation 79 of the LGPS Regulations 1997. Performance Monitoring
As part of our commitment to continued service improvements we operate a system of performance monitoring. The Pensions Administration system monitors the key procedures that are performed by the administration unit. Each procedure is measured against its target and monitored on a monthly basis.
Performance
The pension administration unit aim to perform 97.5% of the procedures within each target timescale. The table below highlights the performance of the administration unit against the key procedure targets.
Procedure Target 2014/15 Achieved within timescale
Processing New Starters 20 days from receipt 100%
Processing Transfer Values (TV’s) 10 working days from the date of notification 100%
Refund of Contributions 10 working days from the request date 100%
Estimates of Benefit Entitlements 10 working days from date of request 100% 10 working days from the receipt of all Pension benefits relevant information 100% Deferred Benefits 10 working days from notification of leaving 100%
Key procedure volumes
The volumes of the key procedures performed by the Pensions administration unit have increased, compared to the previous year.
Procedure 201 4/1 5 201 3/14 Processing New Starters 2,759 2,178 Processing Transfer Values (TV’s) 157 817 Refund of Contributions 220 34 Estimates of Benefit Entitlements 2,432 2,122 Pension benefits 2,024 1,926
22 Deferred Benefits 1,700 2,416 Deaths 521 675 Divorces 119 134 General Enquiries 1,143 1,611 Total 11,075 11,913
Actuarial Valuation of the Fund
Every three years the Fund is required to appoint a suitably qualified actuary to assess solvency and to measure the level of assets compared to liabilities. This process is known as a valuation and the most recent one, carried out by the actuarial firm Aon Hewitt Ltd valued the Fund as at 31 March 2013. The principal conclusions of this valuation were: ♦ The ongoing funding level of the Fund on 31 March 2013 was 101% (2010 – 99%). ♦ The surplus of assets compared to the past service liabilities was £37.0 million (2010 – deficit of assets compared to past service liabilities £17.6 m). ♦ The modest improvement in the funding level was due to the following factors: o Higher than anticipated returns on Fund assets o Increases in pay being lower than expected o Contributions being paid by employers towards the shortfall identified at the 2010 valuation, and o Allowance for the asset transfer from the Durham Pension Fund in relation to the transfer of staff to the Durham and Tees Valley Probation Trust, which was slightly offset by the following factors: o Changes in the financial assumptions used, mainly from a reduction in the future assumed returns, partially offset by a reduction in the assumption made for pay and pension increases, and the removal of the smoothing adjustment that was adopted in the 2010 valuation, and o Changes to the demographic assumptions adopted, in particular the mortality assumptions and allowance for future longevity improvements. ♦ The average cost of accruing benefits payable by the employers, including administration expenses and lump sum death in service benefits, is 14.4% of pensionable pay. ♦ Employers will pay revised levels of contributions that will take in to account their specific circumstances and having regard to the principles set out in the funding strategy statement. The total aggregate Employer contribution rates to the Fund are anticipated to be 14.6% of Pay plus £1.94m (2014/15), 14.5% of Pay plus £1.93m (2015/16) and 14.5% of Pay plus £1.80m (2016/17). In accordance with the provisions of the Regulations the next triennial valuation of the Fund is due to be carried out as at 31 March 2016.
23 Membership
In the 2014/15 financial year the total membership of the Fund has increased by 1,528 to the current total of 68,054.
The number of deferred members of the scheme has risen by 41% in the last 5 years and now forms 36% of the total membership.
Membership Numbers Membership at 31 March 2015
2011 2012 2013 2014 2015 4% Active 24,341 23,856 23,908 23,734 22,566 27% 33% Deferred 18,609 19,717 20,738 22,144 24,429 Pensioner 18,438 19,389 19,850 20,648 21,059 Total 61,388 62,962 64,496 66,526 68,054
36%
Active Deferred Pensioners Dependants
24 Summary of Membership Changes
Active Deferred Pensioners Dependants Total Members Members Members At 01/04/2014 23,734 22,144 18,028 2,620 66,526 Adjustments (1,525) 1,574 214 79 342 New Members 2,279 10 0 210 2,499
Change in Status (1,696) 838 853 (1) (6) Leavers (226) (137) (719) (225) (1,307)
At 31/03/2015 22,566 24,429 18,376 2,683 68,054
% of Total at 01/04/14 35.7% 33.3% 27.1% 3.9% 100.00%
% of Total at 31/03/15 33.2% 35.9% 27.0% 3.9% 100.00%
During the year, 22 employers joined the scheme as scheduled bodies and 5 employers joined as admitted bodies. Also, 2 admitted employers ceased to have active members in the scheme. At the year end, 31 March 2015, the fund had 133 employers with active members.
A full list of participating employers and their membership numbers are as follows;
Membership by Employer at 31 March 2015 Current Employers Active Deferred Pensioners - Pensioners - 2014/15 2013/14 Members Members Members Dependants Total Total
Stockton BC 4,951 5,843 3,215 440 14,449 13,988 Middlesbrough BC 3,649 4,835 2,969 421 11,874 11,721 Redcar & Cleveland BC 2,909 4,198 2,643 329 10,079 10,445 Hartlepool BC 2,919 3,106 1,716 260 8,001 7,693 Cleveland CC 3 846 3,801 777 5,427 5,660 University of Teesside 1,025 858 432 64 2,379 2,273 CSCI 1 504 492 28 1,025 1,031 Cleveland Police Authority 3 286 218 12 519 522
Care Quality Commission 551 120 153 2 826 818 Durham Tees Valley 511 106 0 0 617 731 Probation Trust Coast & Country Housing 407 208 154 9 778 789 Mouchel 219 156 241 13 629 632 Middlesbrough College 422 362 126 13 923 837 Steria 364 48 66 2 480 467 Tristar Homes 249 120 95 10 474 471 Erimus Housing 183 87 140 8 418 418 Stockton Riverside College 147 188 71 6 412 395 Hartlepool College of FE 184 208 78 14 484 441
Housing Hartlepool 211 86 81 4 382 378
25 Beamish 94 125 83 13 315 315 Cleveland Probation 2 112 0 0 114 236 Durham and Tees Valley 32 76 95 26 229 236 Airport Cleveland Fire Authority 120 82 59 5 266 260
Cleveland College of Art & 99 84 50 6 239 226 Design Tees Active Ltd 121 85 25 2 233 232 Tees Valley Leisure 16 93 19 4 132 139 Redcar & Cleveland College 98 113 57 3 271 245
Transit Stagecoach 14 19 138 12 183 184 Unity City Academy 62 78 15 2 157 151 Liberata 33 54 48 6 141 142 MacMillan Academy 93 59 22 1 175 173 Business & Enterprise NE 2 52 28 1 83 83
Kings Academy 80 49 16 1 146 122 Prior Pursglove College 50 32 25 0 107 108
CIC 5 35 54 0 94 94 North Shore Academy 51 52 4 0 107 91
Oakfield Community College 17 35 7 0 59 60
Fabrick Housing 38 10 14 3 65 66 Hartlepool 6th Form 39 21 10 1 71 63 Freebrough Academy 42 14 4 0 60 59
Thornaby Academy 40 27 10 1 78 76 Carillion Integrated Solutions 21 15 8 1 45 45
One Awards Ltd (fomerly 20 15 8 4 47 44 OCN) Stockton 6th Form 21 16 13 0 50 46 RSTM Custody Services 0 17 2 1 20 20
Five Rivers 1 10 2 0 13 19 Carillion Government 12 3 3 0 18 18 Services Learning and Skills Council 6 5 4 0 15 15
OCS 1 3 6 0 10 10 Guisborough Town Council 4 2 5 0 11 9
Ofsted 1 1 7 1 10 43 RM Education Ltd 0 10 1 0 11 11 Taylor Shaw Ltd 0 3 0 0 3 4 Forward Swindon 4 0 0 0 4 4
26 Saltburn & Marske PC 3 2 1 0 6 5
Reliance Secure Task 0 1 1 0 2 2 management Future Regeration of 1 4 1 0 6 6 Grangetown Loftus Town Council 3 0 1 0 4 4 Billingham Town Council 4 0 0 0 4 3
Skelton & Brotton Parish 3 1 0 0 4 4 Council Yarm Town Council 1 0 0 0 1 1 Ingleby Barwick Town Council 1 0 0 0 1 1
Cleveland Fire Support 1 0 0 0 1 1 Network Dimensions UK 0 0 1 0 1 1 Fleet Factors 1 0 0 0 1 1 CMSL RyeHills Catering 4 2 1 0 7 5
Northgate Managed Services 6 0 0 0 6 6 Ltd Wolseley UK Ltd 2 2 0 0 4 4 The Big Life Company Ltd 6 2 1 0 9 9
4Children 3 0 0 0 3 3 Eston Park Academy 27 6 6 0 39 32
Brambles Academy 15 4 0 0 19 18 Pennyman Primary Academy 38 6 2 0 46 39
Chandlers Ridge Academy 21 2 0 0 23 17
Nunthorpe Academy 68 17 2 0 87 78 Ormesby School 45 9 8 0 62 55 KTS Academy 45 7 2 0 54 52 Gillbrook Academy 17 4 1 0 22 22
North Ormesby Primary 16 4 0 0 20 18 Academy Redcar Academy 29 8 4 0 41 35 Crime Commissioner for 25 21 21 4 71 378 Cleveland
Conyers School 82 20 7 0 109 90 All Saints Academy 29 4 0 0 33 29 St Gregory's Catholic 29 12 2 6 49 37 Academy KGB Cleaning & Supp Servs 5 2 0 0 7 7 Ltd
27 SLM Community Leis Char 49 2 2 0 53 52 Trust SLM Food & Beverage Ltd 2 0 0 0 2 2
SLM Fitness & Health Limited 4 3 0 0 7 5
Dyke House Academy 92 6 2 0 100 54
Caldicotes Primary Academy 15 1 0 0 16 16
Tascor Services Ltd – PFI 3 0 0 0 3 3
Tascor Services Ltd – 12 1 1 0 14 14 Custody Hardwick Green Primary 16 2 0 0 18 16 Academy Ecocleen Services Ltd 1 0 0 0 1 1
Extol Ac Trust (Eldon Grove) 29 2 0 0 31 25
Stranton Ac Trust (Stranton) 32 10 0 0 42 28
Stranton Academy Trust 13 0 0 0 13 11 (Owton ) Catcote Academy 113 15 3 0 131 99 Horizons Specialist Academy 157 10 2 0 169 148
St Michael's Catholic 27 8 1 0 36 35 Academy Fredrick Nattrass Primary 29 2 0 0 31 25 Academy Oak Tree Primary Academy 56 3 1 0 60 54
Outwood Academy Acklam 36 5 1 0 42 39
Dormanstown Primary 30 0 1 0 31 27 Academy St Bede's Catholic Academy 28 5 0 0 33 25
Mellors Catering Services Ltd 75 1 0 0 76 5
Sunnyside Academy 60 8 1 0 69 6 Viewley Hill Academy Trust 20 2 0 0 22 1
Norton Primary Academy 42 4 1 0 47 1
Grangefield Academy 60 4 0 0 64 3
Know How North East 1 7 8 1 17 1
Fleet Factors RCBC 2 0 0 0 2 2
28 Chief Constable for Cleveland 296 21 6 0 323 0
One IT Solutions Ltd 18 0 0 0 18 0 Skleton Primary School 51 12 0 0 63 0
Rose Wood Academy 41 3 0 0 44 0
Hemlington Hall Academy 24 3 0 0 27 0
Yarm Primary School 44 4 0 0 48 0 Lockwood Parish Council 2 0 0 0 2 0
Diocese of Middlesbrough 1 0 0 0 1 0 Trust English Martyrs Ed Trust 98 2 3 0 103 0
Easterside Academy 33 1 0 0 34 0 St Margarets Clitherows 22 1 0 0 23 0 CVPA St Gabriels Catholic Academy 25 1 2 0 28 0
St Marys Catholic Academy 15 0 0 0 15 0
St Peters Academy M and C 35 0 1 0 36 0
Green Lane Primary Academy 44 1 0 0 45 0
Kader Academy 20 1 0 0 21 0 Normanby Primary School 41 1 0 0 42 0
Nunthorpe Primary Academy 24 2 0 0 26 0
Creative Management 30 1 0 0 31 0 Services Ltd
Harrow Gate Primary 5 1 0 0 6 0 Academy Ian Ramsey CoE Academy 2 0 0 0 2 0
Ash Trees Academy 1 1 0 0 2 0 St Joseph's Primary Academy 1 0 0 0 1 0
West View Academy 3 0 0 0 3 0 Outwood Academy Bydales 8 0 0 0 8 0
Lincolnshire County Council 1 1 0 0 2 0
Inactive Employers 0 559 745 166 1,470 1,506 22,566 24,429 18,376 2,683 68,054 66,526
29 Internal Dispute Resolution Procedure In the first instance the member should contact the Teesside Pension Fund at the address shown on the page 79. We will send a detailed guide explaining the Internal Dispute Resolution Procedure (IDRP) and how the appeal process will be handled. Any appeal must, ordinarily, be made within six months of receipt of the notification of the decision which is being disputed. The initial review (stage 1) of each case is conducted by a person nominated by the body who made the decision (the ‘adjudicator’). Where an appeal concerns the employer’s decision, the adjudicator is an individual nominated by that employer, if the appeal is about the calculation of benefits, it will be reviewed by the adjudicator for the Teesside Pension Fund. If, after the initial review, the member is still dissatisfied with the decision, they can apply via the second stage of the process to have decision reconsidered. This application must be made within six months of the receiving the decision of the initial review. At the second stage, if the appeal concerns an employer decision, it is reviewed by the Teesside Pension Fund. If the appeal concerns the administrator, then an independent third party pension specialist is appointed. If the member is still not satisfied following the second stage decision, an appeal can be made to the Pensions Ombudsman. However, advice must first have been sought from the Pensions Advisory Service before the Ombudsman will consider the case.
Details of IDRP cases processed in the year
Cases started in year 16 Cases resolved in year 2 Cases upheld 14 Cases dismissed
30 HEAD OF INVESTMENTS’ REPORT
Markets continued to increase over the year, with positive returns across all asset classes. This led to the Teesside Fund returning over 10% for the financial year. During the year, equity markets were initially led lower with the end of monetary stimulus in the United States and the falls in iron ore and oil prices.
Most equity markets recovered towards the year end, with strong year end performance from the US, Japan and the Far East in particular. The US and Far East markets have benefited from a strengthening dollar. Japan’s continued monetary stimulus programme helped make it the best performing of the overseas equity markets with a return to UK investors of 27%.
The UK equity market was more restrained at the year end with investors uncertain about the up-coming general election results; most opinion polls pointed to a hung parliament. In Europe, the Euro declined against other major currencies into the year end as concerns over Greece and a possible default by them began to grow.
The bond market performed strongly, particularly long dated gilts and indexed linked gilts. Despite reaching historic lows, investors hold them for liability matching and regulatory reasons, and continue to buy them at almost any price.
Alternative investments are an asset class that has featured much in the past, with particular press attention to infrastructure assets. Alternatives cover a number of different strategies, the main ones being private equity, hedge funds, infrastructure, and commodities. The Teesside Fund’s alternative portfolio is a very small part of the whole Fund and contains some infrastructure, commodities and other assets that are considered to be uncorrelated to equity and bond markets and over the long term will produce an absolute return. Private equity investments performed strongly over this financial year, an area in which the Teesside Fund does not hold investments.
Property is an asset class the Fund has expanded its investment in the year. The Fund has a strategy to build up the direct portfolio over time to increase the proportion of the Fund invested in this asset class to nearer 10%. Property, as an asset class performed well last year, returning 16%.
The Public Service Pensions Act 2013 set out changes to the governance arrangements for all public sector pension schemes. The Teesside Pension Fund and Investment Panel is still the main decision making committee for the Fund, but this year has seen work begin to create the Teesside Pension Board.
Middlesbrough Council will be asked to approve the Teesside Pension Board on 1 April 2015. The purpose of the Pension Board is to assist Middlesbrough Borough Council, as the Administering Authority, to:
a) Secure compliance with the Regulations, any other legislation relating to the governance and administration of the Scheme, and requirements imposed by the Pension Regulator in relation to the Scheme; and
31 b) To ensure the effective and efficient governance and administration of the Scheme.
Every three years the Fund actuary carries out a full actuarial valuation of the Fund. The purpose of this is to calculate how much employers in the scheme need to contribute going forward to ensure that the Fund’s liabilities, the pensions due to current and future pensioners, will be covered. Unlike most other public sector schemes the LGPS is a funded scheme, i.e. there is a pool of investments which produces income to meet a significant part of the liabilities.
The actuary calculates to what extent the Fund’s assets meet its liabilities. This is presented as a Funding Level. The aim of the Fund is to be 100% funded. At the March 2013 valuation the actuary was able to declare a funding level of 101%. This allowed many of the employers in the Fund to decrease the amount of their contribution for the next three years, releasing money for front-line services. The effects of this valuation came into force from 1 April 2014 with the next valuation due to be carried out using data as at 31 March 2016.
The new valuation gave the Fund a chance to re-evaluate its current asset allocation position through an Asset/Liability Study. This was completed this year with a revised customised benchmark put in place from 1 January 2015 (see table below). The customised benchmark is designed to meet the Fund’s long term requirements.
The value of the Teesside Fund at 31 March 2015 was £3.244 billion, an increase of almost £200 million on the year. The Fund is invested in a wide range of assets. This meets the requirement to have diversification of investments in a fund, so that too great a concentration of investments in one asset class does not expose the Fund to risk of underperformance should that particular asset class perform badly. Comparison of the percentage of the Fund invested in the different categories of investments with the average of other funds shows that the Fund has a greater proportion held in Growth Assets, such as equities and less in Protection Assets, such as bonds.
The percentage amount invested in each asset class is shown below:
Average Teesside TPF Fund Fund Benchmark SIP Max SIP Min Global Pooled 7.00% 0.00% 0.00% 0.00% 0.00% UK Equity 21.20% 36.65% 30.00% 90.00% 50.00% Overseas Equity 33.30% 46.73% 40.00% Alternatives 7.90% 1.84% 5.00% 10.00% 0.00% Property 8.10% 6.44% 10.00% 15.00% 5.00% Other Pooled Assets 2.80% 0.00% 0.00% 0.00% 0.00% Bonds 17.10% 5.02% 13.00% 40.00% 5.00% Cash 2.60% 3.32% 2.00%
100.00% 100.00% 100.00%
32 The Fund’s asset mix % varies from the statutory accounts due to internal classification differences.
The largest 20 holdings, which make up 20.56% of the value of the portfolio as at 31 March 2015 is:
Stock Name % Amount Owned HSBC HOLDINGS 1.76% £ 56,816,100.00 ROYAL DUTCH SHELL A SHARES 1.34% £ 43,172,000.00 GLAXOSMITHKLINE 1.33% £ 42,887,625.00 BP 1.32% £ 42,458,611.67 FIDELITY EUROPEAN FUND GBP 1.31% £ 42,300,082.15 SSGA MPF PAC BASIN EX-JAPAN INDEX 1.21% £ 38,943,944.98 BRITISH AMERICAN TOBACCO 1.19% £ 38,373,500.00 VODAFONE GROUP SHARES 1.12% £ 36,065,453.74 CHINA MOBILE LTD 1.10% £ 35,539,342.78 ASTRAZENECA 1.03% £ 33,072,325.00 SAMSUNG ELECTRONIC CO LTD 0.95% £ 30,600,394.35 ROYAL DUTCH SHELL B SHARES 0.94% £ 30,435,500.00 LIONTRUST UK SMALLER CO-I 0.90% £ 29,036,116.82 DIAGEO PLC 0.84% £ 26,962,750.00 UBS GBL ASSET LIFE SMALLER COMP EQUITY TRACKER B 0.80% £ 25,812,087.75 RIO TINTO 0.73% £ 23,536,885.68
33 INVESCO PERPETUAL UK SMALLER CO. EQUITY FD 0.71% £ 23,028,871.56 BT GROUP 0.68% £ 21,900,000.00 PRUDENTIAL 0.66% £ 21,300,661.36 BARCLAYS 0.65% £ 20,980,575.00
20.56% £ 663,222,827.84
PERFORMANCE
Fund performance is measured by the WM Company, the leading provider of performance measuring services to the public and private sector. Once the Fund’s return over a given period has been calculated it is possible to compare that return with returns from other funds. The return the Fund achieves is one of the factors which the Fund Actuary takes into account when fixing the employer's contribution rate. Any increase in the contribution rate would mean less money to pay for other services. The benefits of scheme members of the Local Government Pension Scheme are related to their salary and length of service, not the value of the Fund.
As Pension Fund investment is a long-term business, it is appropriate that longer-term measures of performance are viewed as more important than short-term measures. It has become standard practice to report the performance of the Fund over 1, 3 and 10 years and to compare performance with other Local Authority Funds. In addition, the Fund participates in a WM survey which compares performance against private sector schemes and also against a customised benchmark. All of these are reported to the Teesside Pension Fund and Investment Panel.
For the purposes of this report the Local Authority survey is used. In the year 2014/15, 85 Local Authority funds were included in the WM Local Authority Pension Fund Service. The aggregate value of these funds was approximately £200 billion.
In the year 2014/15 the Fund achieved a return of 10.2% compared to our benchmark return of 13.2%. This return was also below average and placed Teesside in the 94th percentile of all Local Authority funds.
In the three-year period 2012/13 to 2014/15 the Fund achieved a return of 8.8% per annum compared to our benchmark return of 11.0%. This return was also below average and placed Teesside in the 92nd percentile of all Local Authority funds.
In the ten-year period 2005/06 to 2014/15 the Fund achieved a return of 8.1% per annum compared to our benchmark of 7.9%. This return was above average and placed Teesside in the 37th percentile of all Local Authority funds
Ordinarily, the key to good performance is to get the big decisions right. The weightings between equities and bonds, in particular, will go a long way to determining performance. The Teesside Fund continues to be under-represented in bonds when compared to other
34 Funds. Central Bank policies and their programmes of quantitative easing has helped bonds perform strongly this year, continuing a “bull-run” in bond prices lasting over two decades.
The Fund’s position of being overweight in growth assets, such as equities and underweight in protection assets, such as bonds should have benefitted the Fund’s performance relative to other funds, since equity markets ended this financial year strongly. However, while equity markets in Japan, the Far East and US performed strongly, UK and Europe markets did not, and approximately half the Fund is invested in these two asset classes.
The Teesside Fund continues to invest for long term returns in order to remain fully funded and continue to meet its future liabilities. The long term performance numbers for the Fund are still encouraging. The annualised return on assets for the last ten and twenty years, 8.1% and 8.3% respectively, are well ahead of the Fund’s actuarial requirement. The Fund’s investment advisors continue to promote the view that the best way for the Fund to achieve the level of returns required to meet the liabilities of the Fund is to invest in growth assets.
The Fund is managed internally, although some use is made of pooled investment vehicles to gain exposure to specialist areas. One benefit of this approach is that internal management fees are low. This is clearly demonstrated by another key measure of performance which looks at the cost of managing the Fund. The Department for Communities and Local Government publishes information collected from all local authorities in England and Wales comparing fund investment management costs. These are expressed as £ per scheme member (psm). In other words the total cost (including salaries, accommodation, custodian and other fees) is divided by the total number of members of the scheme, both contributors and beneficiaries.
The result for 2013/14 show that the Fund had investment management costs of £16.81 psm. The average for all Local Authorities in 2013/14 was £99.92 psm. Had the Fund incurred the average psm costs this would have represented, based on the March 2014 membership of 66,526, extra costs of £5.53 million. For 2014/15, the investment management cost was £1.05 million or £15.43 psm, based on membership of 68,054. Comparison figures with other Local Authorities are not available at the time of writing this report.
The Fund’s position regarding risk monitoring and risk control is set out in the Statement of Investment Principles, which can be viewed on-line at www.teespen.org.uk . This is principally concerned with the three forms of risk:
that associated with security of the Fund’s assets, that associated with loss of value relating to those assets, and that associated with the ability of those assets to provide the required rates of return.
As the Fund is largely managed on an in-house basis, appropriate measures are in place to manage investment risk and the Chief Finance Officer also determines the limits on delegation to individual managers.
35 SHAREHOLDER GOVERNANCE
Since the 1980's the policies of the Fund have promoted the view that it is not sufficient to simply hold shares in companies in which it invests. As a responsible shareholder the Fund has sought to influence those companies on a range of issues through dialogue and by voting at AGM's in order to promote shareholder value.
The Fund’s policy is to vote at all AGM’s and EGM’s for UK listed companies where the Fund is a shareholder. An Annual Report on Shareholder Governance is presented to the Investment Panel. This sets out how votes have been cast.
All Local Authority Pension Funds are required to produce a Statement of Investment Principles setting out the Fund's position on a range of issues, including the need to state to what extent, if any, social, environmental and ethical considerations are taken into account in the fund's investment policy and the formulation of a policy on the exercise of voting rights attached to share ownership.
The Fund's Statement can be viewed on the Fund's website www.teespen.org.uk . The Statement has been amended to take into account the recommendations of the Myners Report on Institutional Investment.
The Fund's Statement of Investment Principles states that:
“As a responsible investor, the Teesside Pension Fund wishes to promote corporate social responsibility, good practice and improved company performance amongst all companies in which it invests. The Fund will therefore monitor investee companies to ensure that they meet standards of best practice in relation to their key stakeholders. The Fund considers that the pursuit of such standards aligns the interests of Fund members and beneficiaries with those of society as a whole. In furtherance of this policy, the Fund will support standards of best practice on disclosure and management of corporate social responsibility issues by companies and will pursue constructive shareholder engagement with companies on those issues consistent with the Fund's fiduciary responsibilities.
The Fund will explicitly consider climate change risks and opportunities in the investment process and engage with companies in which we invest to ensure that they are minimising the risks and maximising the opportunities presented by climate change and climate policy.
In accordance with this policy, the Fund will seek where necessary through its own efforts and in alliances with other investors to pursue those goals. To this end the Fund is an active member of the Local authority Pension Fund Forum.”
In order to pursue a policy of positive engagement, the Fund is an active member of the Local Authority Pension Fund Forum, (whose website is www.lapfforum.org ) a grouping of Local Authority funds with investments valued over £100 billion. The Forum works by
36 concentrating on a number of key long-term campaigns, covering corporate governance and corporate responsibility issues, as well as being able to mobilise support for campaigns relating to individual companies. The Forum produces a quarterly Research and Engagement report which highlights latest engagement news.
The Forum’s current activities have recently been agreed to cover the following six areas:
Engagement
The Forum has been building its reach on engagement and will increase this reach to other investor coalitions to support international engagement and cooperation.
The Forum will respond to member requests to address emerging topics and critical governance responsibility issues. It will respond to these investment concerns at companies widely held by the Forum’s members.
The Forum will also maintain up to date holdings data of members’ global investments to develop and maintain engagement relationships with the most widely held companies in each market. Engagement will be on governance, environmental and social issues identified in the context of available best practice for the market or sector.
Positioning the Forum
The Forum will raise its profile, enhance its impact in the “corridors of power”, and convey its own policy agenda more clearly amongst asset owners. Forum members will attend the mainstream party conferences to highlight the concerns of the LGPS.
In order to keep abreast with current investor initiatives the Forum will participate in appropriate networks and attend relevant events. Training will also be provided to mentor and coach Forum members and help individuals to develop knowledge and expertise in particular sectors and provide examples of best practice for funds.
The Forum will also broaden its agenda on investment governance to include insights on investment management arrangements, cost reductions and scheme governance. Governmental and other consultation papers will continue to be monitored and responded to, including those across global markets where relevant to Forum member holdings.
Promoting Good Governance
The Forum continues to believe that companies should be held accountable for providing a true and fair view of their financial position and for maintaining their audited accounts in line with this legal requirement. The Forum will build on its case for reform in conjunction with the partners in the IFRS coalition.
37 The Forum will pursue its analysis on appropriate reforms of the governance of accounting standard setting including that of the Financial Reporting Council. With mergers and acquisitions, the Forum will review the approach of asset managers as compared with the position of asset owners to develop the work. In its tax transparency work, the Forum will initially seek disclosure from FTSE100 companies on existing tax practices. A major policy paper on capital market reforms focussing on shareholder rights and investment governance issues will be published during the year. The Forum will also pursue face-to-face meetings with policy makers and regulators and advocate for reform of relevant regulatory and standard setting bodies.
Responsible Investment
The Forum aims to enhance long term investor understanding of risks embedded in fund portfolios associated with the range of potential policy responses to climate change. For executive remuneration, the Forum will further develop an approach to executive remuneration and the ‘employee value proposition’ that has ‘buy-in’ from both companies and investors. Also, the Forum will engage companies on labour standards and human rights advocating for improved transparency on management of social risks.
Engagement with high carbon-emitting companies in the utilities, oil and gas and extractive sectors will be accelerated by promoting shareholder resolutions filed by member funds and other institutional investors. The Forum will encourage the highest level of support for these member promoted resolutions as well as continue engagement with other high emitting companies, working with the ‘Aiming for A’ investor initiative where relevant. The Forum will advocate for governmental climate policy that provides reliability and predictability to decrease investment uncertainty for investors. Reflecting ongoing member fund interest, engagement will continue with companies involved in ‘fracking’ activities in the UK, informed by collaborative engagement with US and other global companies.
Communications and Website
The Forum will seek to innovate communications, and pursue opportunities to maximise its public profile and advocacy on selected matters. Technical support will be provided for Forum activities including provision of information via the website which will be developed in line with member needs and requests.
Strategic opportunities to position the Forum’s ‘investor voice’ will be taken where appropriate. Voting alerts will continue to be issued in areas of Forum specialism and engagement and a review will be undertaken on their usage. The Forum will keep members regularly informed via a range of publications, bulletins and online media as well as building the Forum’s profile through placed articles, press releases and facilitating responses to media enquiries.
38 In order to enhance the Forum’s external profile and participation of member funds in the Forum’s engagement programme, the website will be upgraded to improve content management, functionality, user experience and ability to integrate content sharing across new media and generate additional traffic to the website. Support will be provided over a range of Forum activities including all technical support at Business Meetings, seminars and conferences; maintenance of the ‘universe manager’ for holdings analysis as well as the Forum’s online presence.
Member Services
The Forum will review the current structure and services and provide potential options for the future for the executive and members to consider. The Forum will continue to provide implementation support for members on responsible investment practices and governance concerns.
Quarterly business meetings will continue to provide an opportunity for all members to come together to discuss current engagement and debate and shape new proposals, guided by executive committee review at quarterly meetings and an annual strategy meeting. Members receive updates on activity over the previous quarter as well as the chance to hear from the executive members on specific company engagements and/or external speakers on a variety of investment topics related to governance or corporate responsibility concerns.
39 LAPFF Membership as at 31 March 2015:
Avon Pension Fund Shropshire Council Barking and Dagenham LB Somerset CC Bedfordshire Pension Fund Sheffield City Region Combined Camden LB Authority Cheshire Pension Fund Suffolk County Council Pension Fund City of London Corporation South Yorkshire Pensions Authority Clwyd Pension Fund Southwark LB Croydon LB Staffordshire Pension Fund Cumbria Pension Scheme Strathclyde Pension Fund Derbyshire CC Surrey CC Devon CC Teesside Pension Fund Dorset County Pension Fund The Cardiff and Vale of Glamorgan Dyfed Pension Fund Pension Fund Ealing LB Tower Hamlets LB East Riding of Yorkshire Council Tyne and Wear Pension Fund East Sussex Pension Fund Waltham Forest LB Enfield LB Wandsworth LB Falkirk Council Warwickshire Pension Fund Greater Gwent Fund West Midlands ITA Pension Fund Greater Manchester Pension Fund West Midlands Pension Fund Greenwich Pension Fund RB West Yorkshire Pension Fund Gwynedd Pension Fund Wiltshire CC Hackney LB Worcestershire CC Haringey LB Harrow LB Hounslow LB Islington LB Lambeth LB Lancashire County Pension Fund Lewisham LB Lincolnshire CC London Pension Fund Authority Lothian Pension Fund Merseyside Pension Fund Newham LB Norfolk Pension Fund North East Scotland Pension Fund North Yorkshire CC Pension Fund Northamptonshire CC Northern Ireland Local Government Officers Superannuation Committee (NILGOSC) Nottinghamshire CC Powys County Council Pension Fund Rhondda Cynon Taf
40
Financial Statements
INDEX
Pages
1 Auditor’s Report 42
2 Statement of Responsibilities for the Financial Statements 44
3 Fund Account and Net Assets Statement 45
4 Notes to the Financial Statements 47
41
INDEPENDENT AUDITOR’S STATEMENT TO THE MEMBERS OF MIDDLESBROUGH COUNCIL ON THE PENSION FUND FINANCIAL STATEMENTS
We have examined the pension fund financial statements for the year ended 31 March 2015, which comprise the Fund Account, the Net Assets Statement and the related notes 1 to 21.
This report is made solely to the members of Middlesbrough Council, as a body, in accordance with Part II of the Audit Commission Act 1998 and for no other purpose, as set out in paragraph 48 of the Statement of Responsibilities of Auditors and of Audited Bodies prepared by the Audit Commission. Our audit work has been undertaken so that we might state to the Authority those matters we are required to state them in an auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Authority, as a body, for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of the Director of Resources and auditor
As explained more fully in the Statement of the Chief Finance Officer Responsibilities, the Chief Finance Officer is responsible for the preparation of the pension fund’s financial statements in accordance with applicable United Kingdom law.
Our responsibility is to report to you our opinion on the consistency of the pension fund financial statements within the pension fund annual report with the pension fund financial statements in the statement of accounts of Middlesbrough Council, and its compliance with applicable law and the CIPFA.LASAAC Code of Practice on Local Authority Accounting in the United Kingdom 2014/15.
We also read the other information contained in the pension fund annual report as described in the contents section and consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the pension fund financial statements.
We conducted our work in accordance with guidance issued by the Audit Commission. Our report on the administering authority’s full annual statement of accounts describes the basis of our opinions on those financial statements.
Opinion In our opinion, the pension fund financial statements are consistent with the full annual statement of accounts of Middlesbrough Council for the year ended 31 March 2015 and except for the opinion on other matters we report on by exception comply with applicable law and the CIPFA/LASAAC Code of Practice on Local Authority Accounting in the United Kingdom 2014/15.
Opinion on other matters
The annual report for the financial year for which the statements are prepared does not contain information on which we can form a view.
42
Matters on which we report by exception
We report to you if, in our opinion, the governance compliance statement does not reflect compliance with the Local Government Pension Scheme (Administration) Regulations 2008 and related guidance.
In my opinion, the governance compliance statement does not reflect compliance with the Local Government Pension Scheme (Administration) Regulations 2008 and related guidance because it has not been published in full in the annual report.
Christopher D Powell (Engagement Lead) For and on behalf of Deloitte LLP Appointed Auditor Leeds
September 2015
43
Statement of Responsibilities for the Financial Statements
The Authority's Responsibilities
The Authority is required: ♦ To make arrangements for the proper administration of its financial affairs and to ensure that one of its officers has the responsibility for the administration of those affairs. In this authority, that officer is the Chief Finance Officer. ♦ To manage its affairs to ensure economic, efficient and effective use of resources and safeguard its assets. ♦ To approve the statements of accounts.
The Responsibilities of the Chief Finance Officer
The Chief Finance Officer is responsible for the preparation of the authority's statement of accounts for the Pension Fund which, in terms of the CIPFA / LASAAC Code of Practice on Local Authority Accounting in Great Britain ("the code") is required to present fairly the financial position of the authority at the accounting date and its income and expenditure for the year ended 31 March 2015. In preparing this statement of accounts, the Chief Finance Officer has: ♦ Selected suitable accounting policies and then applied them consistently; ♦ Made judgements and estimates that are reasonable and prudent; and ♦ Complied with the code. The Chief Finance Officer has also: ♦ Kept proper accounting records, which were up to date; and ♦ Taken reasonable steps for the prevention and detection of fraud and other irregularities.
I certify that these accounts give a true and fair view of the financial position of Teesside Pension Fund as at 31 March 2015 and its income and expenditure for the year then ended.
Paul Slocombe Chief Finance Officer Middlesbrough Council
Dated this th day of 2015
44
Fund Accounts for the year ended 31st March 2015
2013 / 2014 2014 / 2015 £000 Note £000 Contributions and Benefits 88,850 Contributions 6 84,520 31,070 Transfers in 7 5,243 6,086 Other income 8 6,756 126,006 96,519
111,117 Benefits 9 120,746 5,698 Leavers 10 80,755 116,815 201,501
4,543 Management Expenses 11 4,608
Net additions/(withdrawals) from dealings with 4,648 members, employers and others directly (109,590) involved in the fund
Returns on investment 84,045 Investment income 12 89,553 30,933 Change in market value of investments 13 214,604
114,978 Net returns on investments 304,157
119,626 Net increase in the Fund during the year 194,567
2,929,601 Net assets of the scheme as at 1 st April 3,049,227
3,049,227 Net assets of the scheme as at 31 st March 3,243,794
Net Assets Statement as at 31st March 2015
2013 / 2014 2014 / 2015
£000 £000 3,010,484 Investments Assets 13 3,232,586 40,629 Current Assets 14 15,817 935 Receivables due over 1 year 15 299 (2,821) Current liabilities 16 (4,908) st 3,049,227 Net assets of the scheme at 31 March 3,243,794
45
The financial statements summarise the transactions of the scheme and deal with the net assets at the disposal of the Administering Authority. The obligations to pay pensions and benefits that fall due after the end of the scheme year is shown in Note 19 to the accounts and the Actuarial statement included in the Annual report and these accounts should be read in conjunction with it.
The notes on pages 47 to 69 form part of these Financial Statements.
46
Notes to the Financial Statements
1 Basis of preparation
The financial statements have been prepared in accordance with the Local Government Pension Scheme Regulations 2008 (as amended) and with the guidelines set out in the Code of Practice on Local Authority Accounting in the United Kingdom 2014/15 having regard to the Statement of Recommended Practice: Financial Reports on Pensions Schemes (revised May 2007).
2 Accounting policies
Basis on which Receivables and Payables are included in the Accounts The accruals concept has been observed in the preparation of the accounts with the following exception. Transfer values payable and receivable are accounted for on an accruals basis once liability is accepted.
Valuation of Investments Investments have been included in the Net Assets Statement at their market value as at 31 March 2015 as provided by the Fund's custodians. Quoted UK securities are valued at the bid price based on the quotations in the Stock Exchange Daily Official List. Overseas quoted securities are similarly valued at bid price from overseas stock exchanges, translated at closing rates of exchange.
Pooled investment vehicles are valued at closing bid price if both bid and offer prices are published, otherwise at the closing single price. In the case of pooled investment vehicles that are accumulation funds, the change in market value also includes income which is reinvested in the Fund, net of applicable withholding tax.
Other unlisted securities, including partnerships, are valued with regard to latest dealings and other appropriate financial information as provided by their respective managers or those controlling the partnerships.
The acquisition costs of investments are accounted for as part of the cost of investments.
Property is valued annually by an independent qualified valuer in accordance with the “Royal Institute of Chartered Surveyors” valuation standards
Financial Instruments A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another. The term, ‘financial instrument’ covers both financial assets and financial liabilities and includes financial assets and liabilities such as trade receivables and trade payables.
IFRS 13 Fair value Measurement This standard provides a consistent definition of fair value and enhanced disclosure requirements. It is designed to apply to assets and liabilities covered by those IFRS standards that currently permit or require measurement at fair value (with some exceptions). The fund currently complies with this standard.
47
Property expenses Property expenses have been recorded gross and shown as a deduction from the Gross Rental income received in determining net rents from properties.
Foreign exchange Assets and liabilities in foreign currencies are translated at the rate of exchange ruling at the Fund year end date.
Custody and Security of Investments Most investments are held in nominee name by the Fund’s Global Custodian, BNP Paribas Securities Services. Exceptions to this are directly owned properties, money markets cash deposits and specified unquoted investments, which would be registered in the name of the administering authority.
Where the Custodian does not provide a custody service in their own right, they utilise third party Sub Custodians, who are appointed by the Custodian.
The agreement between the Fund and the Custodian provides for certain indemnities where there has been loss as a result or action or inaction by the Custodian or its Sub Custodians. This is supported by limited insurance cover procured by the Custodian.
Disposal of Investments Profits and losses on the disposal of investments are realised when the transactions are legally complete.
Dividends Dividends from quoted securities are accounted for when they become ex- dividend.
Interest on Cash Balances All surplus cash balances of the Fund are invested externally, interest being credited to the Fund.
Pension Liabilities The accounts summarise the transactions and net assets of the Fund. They do not take account of liabilities to pay pensions and other benefits in the future. The actuarial position of the Fund, which does take account of such liabilities, is dealt with in the notes relating to the most recent actuarial valuation.
Rental Income Rental income is accounted for on an accruals basis.
Contributions Contributions are accounted for in the period in which they fall due. Normal contributions received during the year have been paid in accordance with the rates and adjustments certificate.
Benefits Benefits are accounted for in the period in which they fall due. All benefits are calculated in accordance with the statutory regulations in force at the relevant benefit date.
48
Administrative Expenses The administrative expenses of the Fund are incurred by the Administering Authority and are recharged to the Pension Fund periodically during the year. Expenses for Actuarial, Audit and Legal fees are paid directly by the Fund.
Contingent Liabilities The Pension Fund has no contingent liabilities.
Cash and cash equivalents Cash comprises of cash in hand and demand deposits. Cash equivalents are short term, highly liquid investments that are readily convertible to known amounts of cash and that are subject to minimal risk of changes in value.
Value Added Tax Expenses and property purchase costs are charged net to the Pension fund. The VAT is reclaimed via Middlesbrough Council’s VAT regime.
3. Accounting standards that have been issued but not yet been adopted
There are no accounting standards that have been issued but not yet adopted.
4. Critical Judgements, Sensitivities and Accounting Estimates
Unquoted private equity investments It is important to recognise the highly subjective nature of determining the fair value of private equity investments. They are inherently based on forward-looking estimates and judgements involving many factors. Unquoted private equities are valued by the investment managers using the International Private and Venture Capital Association guidelines or European Venture Capital Association definition of conservative value. The value of unquoted private equities at 31 March 2015 was £79,610 ( £144,050 at 31 March 2014).
Pension Fund Liabilities The pension fund liability is calculated every three years by the appointed actuary, with annual updates in the intervening years. The methodology used is in line with accepted guidelines and in accordance with IAS19. Assumptions underpinning the valuations are agreed with the actuary and are summarised in Note 18. This estimate is subject to significant variances based on changes to the underlying assumptions.
5. Assumptions made about the Future and other Major Sources of Estimation Uncertainty
The Statement of the Accounts contains estimated figures that are based on assumptions made by the council about the future or that are otherwise uncertain. Estimates are made taking into account historical experience, current trends and other several factors. However, because balances cannot be determined with certainty, actual results could be materially different from the assumptions and estimates.
49
Item Uncert ainties Effect if actual results differ from assumptions Actuarial present value Estimation of the net liability to The effects on the of promised retirement pay pensions depends on a net pension liability benefits number of complex judgements of changes in relating to the discount rate used, individual the rate at which salaries are assumptions can be projected to increase, changes in measured e.g. a retirement ages, mortality rates 0.1% pa increase in and expected returns on pension the discount factor fund assets. A firm of consulting could decrease the actuaries is engaged to provide liability by c £74.89 the fund with expert advice about million. the assumptions to be applied.
Debtors At 31 March 2015, the fund had a There is no history of balance of sundry debtors of uncollectable debtors £8.5 million. Private Equity Private Equity investments are The total private valued at fair value in equity investments in accordance with the International the financial Private and Venture Capital statements are Association guidelines or £79,610. There is a European Venture Capital risk that this Association definition of investment may be conservative value. These under or overstated investments are not publicly in the accounts. The listed and as such there is a remaining Items with degree of estimation involved in unobservable market the valuation. values amount to £91,595,390 and are relating to infrastructure, real estate and pooled equity vehicles.
6. Contributions 2013 / 14 2014 / 15 £000 £000 Employers Normal 60,506 57,125 Additional Contributions 550 48 Deficit Recovery Contributions 2,376 1,859 Members Normal 25,418 25,488 Total 88,850 84,520
The actuarial valuation at 31st March 2013 calculated that the Fund was 101% funded.
50
Analysis of Total Contributions 2013 / 14 2014 / 15 £000 £000 Administering Authority 13,254 12,345 Scheduled Bodies 57,819 54,037 Admitted Bodies 17,777 18,138 Total 88,850 84,520
7. Transfers in 2013 / 14 2014 / 15 £000 £000 Individual transfer in from other schemes 31,070 5,243
In 2013/14 a Transfer in amount of £27.8 million was accrued in respect of a group transfer in for Durham Probation Trust. The actual cash amount was received in August 2014.
8. Other income 2013 / 14 2014 / 15 £000 £000 Capital Costs of Early Retirements 4,864 5,528 Other income 1,222 1,228
Total 6,086 6,756
9. Benefits 2013 / 14 2014 / 15 £000 £000 Pensions 89,648 94,860 Commutations and lump sum retirement benefits 18,683 23,701
Lump sum death benefits 2,786 2,185 Total 111,117 120,746
Analysis of Total Benefits 2013 / 14 2014 / 15 £000 £000 Administering Authority 26,025 27,884 Scheduled Bodies 66,836 68,540 Admitted Bodies 18,256 24,322 Total 111,117 120,746
51
10. Leavers 2013 / 14 2014 / 15 £000 £000 Refunds to members leaving service 13 101 Payments for members joining state scheme 2 19 Individual and bulk transfers to other schemes 5,683 80,635 Total 5,698 80,755
In 2014/15 a Transfer out amount of £75.1 million was paid to Tameside Pension Fund (part of the Greater Manchester Pension Fund) in respect of a group transfer out for Durham Probation Trust £27.8 million and Tees Valley Probation £47.3 million.
11. Management Expenses Restated 2013 / 14 2014 / 15 £000 £000 Administrative costs 1,579 1,599 Investment management expenses 2,717 2,779 Oversight and Governance costs 247 230 Total 4,543 4,608
This analysis of costs of managing the Teesside Pension Fund has been prepared in accordance with CIPFA guidance. Both 2014/15 and 2013/14 figures show a re- allocation of management expenses. The main adjustments are for management costs previously allocated to investment assets in 2014/15 £1,730k (2013/14 £1,695k) .
12. Investment Income 2013 / 14 2014 / 15 £000 £000 Income from fixed interest securities 4,784 3,718 Dividends from equities 65,943 71,323 Income from Index-Linked Securities 1,590 1,388 Income from pooled investment vehicles 3,829 3,053 Other investment income 0 219 Net rents from properties (see note below) 7,035 9,317 Interest on cash deposits 864 535 Total 84,045 89,553
201 3/ 1 4 201 4 / 15 Rental Income and Property Expenses £000 £000 Gross Rental income 7,590 9,652 Property Expenses (555) (335) Net Rents from Properties 7,035 9,317
52
13. Investment Assets
Restated Change Value at in Value at 31 March Purchases Sale Market 31 March 2014 at Cost Proceeds Value 2015 £000 £000 £000 £000 £000 Fixed interest securities 108,005 22,027 (43,389) 2,723 89,366 Equities 2,164,694 283,471 (197,207) 179,986 2,430,944 Index-linked securities 84,345 0 (18,439) 7,558 73,464 Pooled Investment Vehicles 376,476 11,791 (33,312) 13,827 368,782 Properties 122,985 41,335 (5,200) 10,510 169,630 2,856,505 358,624 (297,547) 214,604 3,132,186
Cash Deposits 132,200 73,803 Other Investment Balances 21,779 26,597
3,010,484 3,232,586
Re -allocation of market value brought forward
The investment asset categories for the market value at 31 st March 2014 have been re-allocated to their correctly identified asset groups following a comprehensive investment reconciliation of assets brought forward. The re- allocations were primarily between equities and pooled investment vehicles (£21.5 million) and fixed interest and index linked securities (£12.6 million).
Change in Market Value The change in the market value of investments during the year comprises all increases and decreases in the market value of investments held at any time during the year, including profits and losses realised on sales of investments during the year. Realised profit was £62,087,798 and unrealised gain was £152,516,202.
Transaction Costs Transaction costs are included in the cost of purchases and sale proceeds. Transaction costs include costs charged directly to the scheme such as fees, commissions, stamp duty and other fees. Transaction costs incurred during the year amounted to £1,730,084 (2014 – £1,694,520). In addition to the transaction costs disclosed here, indirect costs are incurred through the bid-offer spread on investments within pooled investment vehicles. The amount of indirect costs is not separately provided to the Fund. For accounting purposes the transaction costs have been re-allocated to expenses.
53
Investments analysed by fund manager The fund is mainly in-house managed with the only exception being the direct property portfolio managed by CBRE Limited. For 2014/15 the value at 31 March 2015 of the direct property portfolio was £169,630,000 For 2013/14 the value at 31 March 2014 of the direct property portfolio was £122,985,000 The remainder of the Fund is all managed in-house. The Fund does not have any single investment over 5% of the net assets of the scheme. The following investments represent more than 5% of any class or type of security. The asset classes used for this note are not the CIPFA classifications, but those represented in the Fund's valuation by its Custodian and reported to the Teesside Pension Fund and Investment Panel.
Asset Class / Security Market % of Market % of Value 31 asset Value 31 asset March class March class 2014 2015 £'000 £'000 UK Fixed Interest BAT INTL FINANCE 7.25% MTN 12/03/24 GBP 3,301 6.94% 3,541 7.00%
HSBC BANK FRN 16/05/2016 3,007 6.32% 3,009 5.94% NATIONAL GRID 6.125% 15/04/2014 3,062 6.43% - - NEXT PLC 5.875%-06-12/10/2016 - - 3,211 6.34% TREASURY 1.75% 07/09/22 GBP0.01 3,006 6.32% 3,285 6.49% TREASURY 4.25% 07/09/39 GBP0.01 - - 2,745 5.42% TREASURY 5% 07/03/2025 GBP100 - - 2,535 5.01% UK Index-Linked NATL GRID GAS PLC 4.1875%IDX LKD BDS 14/12/2022 3,008 5.23% 3,046 5.52% NETWORK RAIL INFRA 1.375% IDX/LKD 22/11/37 GBP 4,799 8.34% - -
TREASURY 0.125% I/L 22/03/44 GBP - - 3,499 6.34%
TREASURY 1.125% I/L 22/11/37 GBP 3,190 5.55% 3,817 6.91%
TREASURY 1.25% I/L 22/11/2032 6,190 10.76% 3,345 6.06%
TREASURY 1.25% I/L 22/11/27 GBP 4,837 8.41% 5,347 9.69%
54
TREASURY 2% I/L 26/01/35 GBP0.01 5,938 10.33% 6,872 12.45%
TREASURY 4.125% I/L 22/07/30 GBP 6,251 10.87% 6,838 12.39%
UK Equities HSBC HLDGS ORD USD0.50(UK REG) 60,740 5.18% 56,816 4.79%
Overseas Bonds ALTRIA GROUP INC 4.25% DUE 08- 09-2042 2,388 2.74% 3,039 5.33% AUSTRALIA (CMNWLTH) 4% IDX LKD 20/08/20 AUD 1000 3,086 3.54% 3,026 5.31% US TREASURY TIPS 3.375 04/15/2032 2,733 3.13% 3,263 5.72% Property
Direct – Stow-on-the-Wold (Fosse Way) 13,525 8.39% 13,850 6.64%
Direct - Birmingham (Bromford Central) 9,900 6.14% 13,500 6.47%
Royal London Property Investment 8,899 5.52% 9,779 4.69% Standard Life Investments European Property Growth Fund 13,656 8.47% 12,017 5.76%
Alternatives AXA FRAMLINGTON BIOTECH FUND R AC 4,116 5.85% - -
Darwin Leisure Prop Units Cls 'C' 13,145 18.68% 14,481 24.28% ETFS Metal Security Physical Gold 6,766 9.62% 6.979 11.70% F&C WATER & AGRICULTURE EQUITY LONG/SHORT FUND 6,335 9.00% - - Innisfree PFI Continuation Fund 9,526 13.54% 9,506 15.94% INNISFREE PFI SECONDARY FUND 2 5,930 8.43% 6,784 11.37%
NIMROD SEA ASSETS LTD 4,544 6.46% 5,204 8.72%
POWERSHARES DB MULTI SECTOR COMMODITY AGRICULTURE FUND 8,496 12.08% 7,453 12.50%
UNITED STATES OIL FUND LP UNITS 8,224 11.69% 7,534 12.63%
55
Geographical Analysis of Investments
2013 / 14 2014 / 15 £000 % £000 % United Kingdom 1,600,010 56% 1,639,198 52% United States 263,364 9% 366,891 12% Hong Kong 105,667 4% 150,108 5% Japan 153,666 5% 193,728 6% Australia 129,782 5% 129,416 4% Germany 86,979 3% 85,222 3% Switzerland 68,248 2% 80,222 3% Republic of Korea 83,807 3% 97,670 3% Singapore 52,586 2% 50,863 2% France 71,403 3% 68,414 2% Taiwan 63,649 2% 79,098 3% Others 177,344 6% 191,356 5% Total 2,856,505 100.00% 3,132,186 100.00%
Fixed Interest Securities
Restated 2013 / 14 2014 / 15 £000 £000 UK public sector quoted 47,590 50,616 Overseas public sector quoted 60,415 38,750 Total 108,005 89,366
Equities
Restated 2013 / 14 2014 / 15 £000 £000 UK quoted 1,055,230 1,069,296 Overseas quoted 1,109,464 1,361,648 Total 2,164,694 2,430,944
Index-linked securities
Restated 2013 / 14 2014 / 15 £000 £000 UK quoted 57,509 55,204 Overseas quoted 26,836 18,260 Total 84,345 73,464
56
There has been a re-classification of investment assets for the brought forward valuation at 31 st March 2014, for the above investments due to a comprehensive reconciliation identifying the correct asset groups.
Pooled Investment Vehicles
Restated 2013 / 14 2014 / 15 £000 £000 Unit and Investment trusts UK 209,315 201,691 Overseas 167,161 167,091 Total 376,476 368,782
UK Properties
2013 / 14 2014 / 15 £000 £000 Freehold 87,385 134,555 Leasehold 35,600 35,075 Total 122,985 169,630
The properties were valued on the basis of Market Value as at 31 March 2015 by Cushman and Wakefield LLP acting as an External Valuer in accordance with the RICS Valuation - Professional Standards. The valuer's opinion of the Market Value of the Fund's interests in the properties was primarily derived from analysis of recent market transactions concluded at arm's-length.
Cash Deposits
2013 / 14 2014 / 15 £000 £000 Sterling Cash deposits 132,200 73,803
Other investment balances
2013 / 14 2014 / 15 £000 £000 Cash deposits with custodian 3,497 7,355 Outstanding dividend entitlements 18,239 19,189 Interest due on cash deposits 43 53 Total 21,779 26,597
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Outstanding Commitments As at 31 March 2015, the Fund had outstanding commitments to five investments.
Capital Outstanding Initial Payments Commitment as Year Commitment made at 31 March 2015 £000 £000 £000 Capital NE No1 Ltd Partnership 2002 750,000 750,000 0 Granville Northern Private Equity 1998 3,000,000 2,499,201 500,799 Fund Innisfree PFI Continuation Fund 2006 10,000,000 9,708,498 291,502 Innisfree PFI Secondary Fund 2 2012 10,000,000 8,816,613 1,183,387 Teesside Private Equity Fund 1998 1,960,000 1,415,462 544,538 Total 25,710,000 23,189,774 2,520,226
14. Current assets
2013 / 14 2014 / 15 Receivables £000 £000 Other receivables 4,565 7,844 Other receivables – Group transfer debtor 27,800 0 Sundry debtors 921 685 Contributions due in respect of Employers 5,067 4,851 Members 2,038 2,079 Cash balances 238 358 Total 40,629 15,817
2013 / 14 2014 / 15 Analysis of Receivables £000 £000 Central government bodies - - Other local authorities 8,351 7,385 NHS bodies - - Public corporations and trading funds - - Other entities and individuals 32,040 8,074 Sub-total 40,391 15,459 Add cash balances 238 358 Total 40,629 15,817
15. Receivables due over 1 year
2013 / 14 2014 / 15 £000 £000 Capital cost of early retirements 935 299
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2013 / 14 2014 / 15 Analysis of receivables due over 1 year £000 £000 Central government bodies - - Other local authorities 935 299 NHS bodies - - Public corporations and trading funds - - Other entities and individuals - - Total 935 299
Scheduled Bodies have the option to pay the capital cost of Early Retirements over five years.
16. Current liabilities
2013 / 14 2014 / 15 £000 £000 Rents received in advance 1,047 700 Accrued expenses 941 3,509 Other payables 833 699 Total 2,821 4,908
2013 / 14 2014 / 15 Analysis of Creditors £000 £000 Central government bodies - - Other local authorities 941 2,451 NHS bodies - - Public corporations and trading funds - - Other entities and individuals 1,880 2,457 Total 2,821 4,908
17. Related Party Transactions
The Fund is administered by Middlesbrough Council which is a related party as defined by International Accounting Standard 24 (IAS 24) 'Related Party Disclosures'. IAS 24 requires disclosure of information on related party transactions. In its position as Administering Authority Middlesbrough Council has recharged scheme administration services to the Fund as follows;
2013 / 14 2014 / 15 £000 £000
Support Service Recharges payable for the year and outstanding at the year end 322 315
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In addition Middlesbrough Council had a £260 million, 10 year partnership with Mouchel Business Services for the provision of business, finance, IT, HR and other support services which commenced 1st June 2001. The partnership was subsequently extended for a further 5 years to 31 May 2016.
Mr Fred Green is an investment adviser to the Teesside Pension Fund. His costs to the fund in 2014/15 were £9,392. He is also a member of the Teesside Pension Fund and is in receipt of benefits.
18. Actuarial Valuation
Contributions are paid to the Fund by the employers to provide for the benefits which will become payable to Scheme members when they fall due. The funding objectives are to meet the cost of Scheme members’ benefits whilst they are working and to build up assets to provide adequate security for the benefits as they accrue. In order to check that the funding objectives are being met the Fund is required to carry out an Actuarial Valuation every 3 years, The Triennial Valuation. An Actuarial Valuation was carried out as at 31 st March 2013 using the ‘Projected Unit Method’ which produced the following results;
£ million Net Liabilities 2,919 Assets 2,956 Surplus 37 Funding Level 101.27%
IAS19/26 Disclosure Following the introduction of International Financial Reporting Standards (IFRS) the Fund is now required, under International Accounting Standard (IAS)26 “Accounting and Reporting by Retirement Benefit Plans” (January 1987), to disclose the actuarial present value of promised retirement benefits. The calculation of this disclosed amount must be determined in accordance with IAS19 “Employee Benefits” (February 1998).
An IAS26/19 valuation was carried out for the Fund as at 31 March 2015 by Aon Hewitt with the following results;
£ million Net Liabilities 4,100 Assets 3,239 Deficit (861)
These figures are presented for the purposes of IAS19 only. They are not relevant for calculations undertaken for funding purposes or for other statutory purposes under UK pension legislation.
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The actu arial assumptions used to calculate the promised va lue of benefits at 31 March 2015 were: RPI increases 2.9% per annum CPI increases 1.8% per annum Salary increases 3.3% per annum Pension increases 1.8% per annum Discount rate 3.2% per annum
The assumed life expecta ncy from age of 65 (years) Longevity at 65 for current pensioners: Men 23.00 Women 25.50 Longevity at 65 for future pensioners : Men 25.20 Women 27.80
19. Additional Voluntary Contributions (AVC’s)
Scheme members may make Additional Voluntary Contributions that are invested with the Fund’s nominated AVC providers, the Prudential Assurance Co Ltd and Phoenix Life PLC. These contributions are not part of the Pension Fund and are not reflected in the Fund’s accounts in accordance with regulation 5c of the Pension Scheme (Management and Investment of Funds) Regulations 1998. The value of AVC investments are as follows:
Prudential AVC balances
2013/14 2014/15 £000 £000 With Profits and Deposit Accounts 3,894 3,649 Unit Linked Accounts 1,685 2,153 Total 5,579 5,802
The total value of AVC contributions paid to Prudential during the year was £1,399,143.
20. Financial Instruments
Net Gains and Losses on Financial Instruments Restated 2013/14 2014/15 Financial Assets £000 £000 Fair Value through profit and loss account 30,933 214,604 30,933 214,604
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Management expenses have been re-categorised according to CIPFA guidance and now includes transaction costs which were previously assigned to investment assets.
Fair Value of Financial Instruments
The investment asset categories for the market value at 31 st March 2014 have been re-allocated to their correctly identified asset groups following a comprehensive investment reconciliation of assets brought forward. The re- allocations were primarily between equities and pooled investment vehicles (£21.5 million) and fixed interest and index linked securities (£12.6 million).
Fair Value through profit and loss Fair Carrying Fair Carrying Value Value Value Value
Restated 31 March 2014 31 March 2015 £000 £000 £000 £000 Fixed Interest Securities 108,005 108,005 89,366 89,366 Equities 2,164,694 2,164,694 2,430,944 2,430,944 Index-linked securities 84,345 84,345 73,464 73,464 Pooled Investments 376,476 376,476 368,781 368,782 Properties 122,985 122,985 169,630 169,630 2,856,505 2,856,505 3,132,186 3,132,186 Loans and receivables 154,149 153,979 100,732 100,400 3,010,654 3,010,484 3,232,918 3,232,586
Valuation of financial instruments carried at fair value The valuation of financial instruments has been classified into three levels, according to the quality and reliability of information used to determine fair values.
Level 1 Financial instruments at Level 1 are those where fair values are derived from unadjusted quoted prices in active markets for identical assets or liabilities. Products classified as level 1 comprise quoted equities, quoted fixed securities, quoted index linked securities and unit trusts. Listed investments are shown at bid prices. The bid value of the investment is based on the bid market quotation of the relevant stock exchange.
Level 2 Financial instruments at Level 2 are those where quoted market prices are not available; for example, where an instrument is traded in a market that is not considered to be active, or where valuation techniques are used to determine fair value and where these techniques use inputs that are based significantly on observable market data.
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Level 3 Financial instruments at Level 3 are those where at least one input that could have a significant effect on the instrument's valuation is not based on observable market data. Such instruments would include unquoted equity investments and hedge fund of funds, which are valued using various valuation techniques that require significant judgement in determining appropriate assumptions. The values of the investment in private equity are based on valuations provided by the general partners to the private equity funds in which Teesside Pension Fund has invested. These valuations are prepared in accordance with the International Private Equity and Venture Capital Valuation Guidelines, which follow the valuation principles of IFRS and US GAAP. Valuations are usually undertaken as at 31st March annually. Cashflow adjustments are used to roll forward the valuations to 31 March as appropriate.
Teesside Pension Fund has no investments in hedge funds. The following table provides an analysis of the financial assets and liabilities of the pension fund grouped into Levels 1 to 3, based on the level at which the fair value is observable.
Valuation of financial instrument carried at fair value
Value as at 31st March 2015 Quoted Using Market Observable With significant Price inputs unobservable Level 1 Level 2 Level 3 £000 £000 £000 Financial assets at fair value through profit and loss account 2,870,881 169,630 91,675 Loans and receivables 100,732 - - Total Financial Assets 2,971,613 169,630 91,675
Value as at 31st March 2014 Quoted Using Market Observable With significant Price inputs unobservable Level 1 Level 2 Level 3 £000 £000 £000 Financial assets at fair value through profit and loss account 2,647,501 122,985 86,019 Loans and receivables 154,149 - - Total Financial Assets 2,801,650 122,985 86,019
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Nature and extent of exposure to risk arising from financial instruments Risk and risk management
The fund's primary long term risk is that the fund's assets will fall short of its liabilities (i.e. promised benefits payable to members). Therefore, the aim of investment risk management is to minimise the risk of an overall reduction in the value of the fund and to maximise the opportunity for gains across the whole fund portfolio. The fund achieves this through asset diversification to reduce exposure to market risk (price risk, currency risk and interest rate risk) and credit risk to an acceptable level. In addition, the fund manages its liquidity risk to ensure there is sufficient liquidity to meet the fund's forecast cashflows.
Responsibility for the fund's risk management strategy rests with the Teesside Pension Fund and Investment Panel. The Funding Strategy Statement and the Statement of Investment Principles identify and analyse the risks faced by the pensions operations. These policies are reviewed regularly to reflect changes in activity and market conditions.
Market risk Market risk is the risk of loss from fluctuations in equity and commodity prices, interest and foreign exchange rates and credit spreads. The fund is exposed to market risk from its investment activities, particularly through its equity holdings. The level of risk exposure depends on market conditions, expectations of future price and yield movements and the asset mix.
The Fund identifies, manages and controls market risk exposure within acceptable parameters, whilst optimising the return on risk. In general, excessive volatility in market risk is managed through the diversification of the portfolio in terms of geographical and industry sectors and individual securities. To mitigate market risk, the council and its investment advisors undertake appropriate monitoring of market conditions and benchmark analysis.
The fund manages these risks in three ways:
1. The actuarial valuation of the Fund which is carried out every three years and resets the employer contribution rates; 2. The asset liability study which is carried out every three years or more frequently if required considers alternative asset allocations for the Fund and the long term impact on employer contribution rates; 3. Quarterly monitoring of the performance of the Fund against selected benchmarks, and annual performance reports to the Investment Panel.
Other Price risk Other price risk represents the risk that the value of a financial instrument will fluctuate as a result of changes in the market prices ( other than those arising from interest rate risk or foreign exchange risk), whether those changes are caused by factors specific to the individual instrument or its issuer or factors affecting all such instruments in the market.
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The fund is exposed to share price risk. This arises from investments held by the fund for which the future price is uncertain. All securities investments present a risk of loss of capital. The maximum risk resulting from financial instruments is determined by the fair value of the financial instruments. The fund's investment managers mitigate this price risk through diversification and the selection of securities and other financial instruments is monitored by the council to ensure it is within limits specified in the Fund Strategy Statement and Statement of Investment Principles.
Other Price risk - sensitivity analysis
Following analysis of historical data and expected investment return movement during the financial year, in consultation with the W M Company (performance monitoring company), the Fund has determined that the following movements in market price risk are reasonably possible for the 2014/15 reporting period.
Value on Value on 2014 / 15 Price Risk Value Change Increase Decrease Asset Type Region £000 % £000 £000 Equities UK 1,069,296 10.20% 1,178,364 960,228 OVERSEAS 1,361,648 9.49% 1,490,868 1,232,428 Equities Total 2,430,944 2,669,232 2,192,655 Fixed Interest Securities UK 50,616 6.17% 53,739 47,493 OVERSEAS 38,750 7.49% 41,652 35,848 Fixed Interest Securities Total 89,366 95,391 83,341 Index Linked UK 55,205 8.30% 59,787 50,623 OVERSEAS 18,259 7.49% 19,627 16,891 Index Linked Total 73,464 79,414 67,514 Managed and Unitised Funds UK 201,690 10.20% 222,262 181,118 OVERSEAS 167,092 9.49% 182,949 151,235
Managed and Unitised Funds Total 368,782 405,211 332,353 Property UK 169,630 1.53% 172,225 167,035 Property Total 169,630 172,225 167,035 Grand Total 3,132,186 3,421,473 2,842,898
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Restated Value on Value on 2013 / 14 Price Risk Value Change Increase Decrease Asset Type Region £000 % £000 £000 Equities UK 1,055,230 12.07% 1,182,596 927,864 OVERSEAS 1,109,464 12.38% 1,246,816 972,112 Equities Total 2,164,694 2,429,412 1,899,976 Fixed Interest Securities UK 47,590 5.00% 49,970 45,211 OVERSEAS 60,415 7.14% 64,729 56,101 Fixed Interest Securities Total 108,005 114,698 101,312 Index Linked UK 57,509 7.59% 61,874 53,144 OVERSEAS 26,836 7.14% 28,752 24,920 Index Linked Total 84,345 90,626 78,064 Managed and Unitised Funds UK 209,315 12.07% 234,579 184,051 OVERSEAS 167,161 12.38% 187,856 146,466
Managed and Unitised Funds Total 376,476 422,435 330,517 Property UK 122,985 1.25% 124,522 121,448 Property Total 122,985 124,522 121,448 Grand Total 2,856,505 3,181,693 2,531,317
Interest rate risk Interest rate risk is the risk to which the Fund is exposed to changes in interest rates and relates to its holdings in bonds and cash. The Fund's direct exposure to interest rate movements as at 31 March 2015 and 31 March 2014 is set out below.
Asset Type Restated As at 31 As at 31 March March 2015 2014 £000 £000 Cash and cash equivalents 132,200 73,803 Other investment balances 21,779 26,597 Fixed interest securities 108,005 89,366 Total 261,984 189,766
Interest rate risk Sensitivity analysis The Fund recognises that interest rates can vary and can affect both income to the fund and the value of the net assets available to pay benefits. The analysis that follows assumes that all other variables, in particular exchange rates, remain constant, and shows the effect in the year on the net assets available to pay benefits of a +/- 25 BPS change in interest rates.
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Asset Type Car rying Change in year in amount the net assets as at 31 available to pay March benefits 2015
+ 25 BPS - 25 BPS £000 £000 £000 Cash and cash equivalents 73,803 185 (185) Other investment balances 26,597 66 (66) Fixed interest securities 89,366 223 (223) Total 189,766 474 (474)
Asset Type Restated Carrying Change in year in the net amount assets available to pay as at 31 benefits March 2014 + 25 BPS - 25 BPS £000s £000s £000s Cash and cash equivalents 132,200 331 (331) Other investment balances 21,779 54 (54) Fixed interest securities 108,005 270 (270) Tota l 261,984 655 (655)
Currency risk Currency risk represents the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The fund is exposed to currency risk on financial instruments that are denominated in any currency other than the functional currency of the fund (£UK). The fund's currency rate risk is considered by the Fund's Investment Advisors and Investment Managers. The Investment Panel are informed quarterly of the Fund's currency exposure. The following tables summarise the fund's currency exposure as at 31 March 2015 and as at 31 March 2014, showing the sensitivity analysis of foreign exchange movements.
Currency Risk (by currency) 201 4 / 1 5 Value on Value on Currency Value Change Increase Decrease £000s % £000s £000s Australian Dollar 129,416 8.87% 140,895 117,936 Canadian Dollar 6,910 6.65% 7,370 6,451 Chinese Yuan 1,082 7.91% 1,167 996 Danish Krone 22,074 6.19% 23,440 20,708 EURO 212,437 6.15% 225,502 199,372 Hong Kong Dollar 150,108 7.74% 161,726 138,490 Indian Rupee 6,918 10.78% 7,664 6,172 67
Japanese Yen 193,729 11.02% 215,077 172,380 South Korean Won 97,670 6.62% 104,136 91,204 Malaysian Ringet 2,046 7.31% 2,196 1,897 Norwegian Krone 22,065 8.64% 23,971 20,159 New Zealand Dollar 6,671 9.20% 7,285 6,058 Swedish Krona 34,472 7.30% 36,989 31,956 Singapore Dollar 50,863 5.89% 53,859 47,867 Swiss Franc 80,222 9.34% 87,714 72,729 Thailand Baht 69 8.08% 74 63 Taiwan Dollar 79,098 6.62% 84,335 73,862 US Dollar 379,288 7.78% 408,797 349,780 Asia Pacific ex Japan Basket 38,944 6.44% 41,452 36,436 Emerging Basket 26,454 6.80% 28,252 24,655 Europe Basket 53,817 3.78% 55,851 51,783 Europe ex UK Basket 12,017 5.66% 12,697 11,337 Total 1,606,370 7.7% 1,730,449 1,482,291
Currency Risk (by currency) 201 3 / 1 4 Value on Value on Currency Value Change Increase Decrease £000s % £000s £000s Australian Dollar 128,564 9.80% 141,163 115,965 Canadian Dollar 10,045 6.04% 10,652 9,438 Chinese Yuan 6,182 5.21% 6,504 5,859 Danish Krone 17,635 6.26% 18,739 16,531 EURO 197,768 6.31% 210,247 185,289 Hong Kong Dollar 105,667 7.98% 114,099 97,234 Indian Rupee 4,907 10.84% 5,438 4,375 Japanese Yen 153,666 11.54% 171,399 135,933 South Korean Won 83,807 6.56% 89,305 78,309 Malaysian Ringet 2,345 7.02% 2,510 2,181 Norwegian Krone 30,725 8.79% 33,426 28,024 New Zealand Dollar 3,570 10.04% 3,928 3,211 Swedish Krona 34,059 7.03% 36,453 31,665 Singapore Dollar 52,586 5.71% 55,589 49,583 Swiss Franc 69,277 7.42% 74,417 64,136 Taiwan Dollar 63,649 5.63% 67,232 60,065 Thai Baht 60 7.41% 64 55 US Dollar 289,436 8.07% 312,793 266,078 Asia Pacific ex Japan Basket 35,226 6.11% 37,379 33,074 Emerging Basket 34,074 6.37% 36,245 31,904 Europe Basket 49,116 4.08% 51,120 47,112 Europe ex UK Basket 13,656 6.01% 14,477 12,836 Global Basket 11,867 5.21% 12,487 11,251 Total 1,397,887 7.7% 1,505,666 1,290,108
Following analysis of historical data in consultation with the WM Company (performance monitoring company), the council considers the likely volatility associated with foreign exchange rate movements to be as shown above.
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A % strengthening/weakening of the pound against the various currencies in which the fund holds investments would increase/decrease the net assets available to pay benefits as highlighted above.
Credit risk Credit risk represents the risk that the counterparty to a transaction or a financial instrument will fail to discharge an obligation and cause the fund to incur a financial loss.
The Fund is exposed to credit risk on its investment portfolio, including its cash deposits, and on the contributions receivable from the Fund's participating employers.
The market values on investments usually reflect an assessment of credit risk in their pricing and as a result the risk of the loss is implicitly provided for in the fair value of the Fund's investments. Credit risk is considered as part of the investment decisions made by the Investment Managers as part of their portfolio construction.
Credit risk on cash deposits is managed by Middlesbrough Council's in-house Treasury Management Team, following the Council's Treasury Management Policy. This policy is described in detail in Middlesbrough Council's Annual Report.
Credit risk on contributions receivable from employers is minimised by regular monitoring of monthly receipt of payments from employees. There is no provision for doubtful debts against the amounts due from employers as at 31 March 2015. The LGPS Regulations require that a risk assessment of any new transferee admitted body is carried out, and that a bond or guarantee is obtained where necessary. The Teesside Pension Fund and Investment Panel must approve the admission of any new body. Bonds or guarantees have been obtained for the Fund's admitted employers, where possible. The Fund is potentially exposed to credit risk from certain scheduled employers that have neither tax- raising powers nor a guarantee from central government.
Collateral and other credit enhancement
The pension fund does not use collateral and other credit enhancement.
Liquidity risk Liquidity risk is the risk that the fund will not be able to meet its financial obligations as they fall due. The Fund holds in-house cash resources to meet the day to day needs and to pay pensions. If there is insufficient cash available to meet immediate needs, there are sufficient other assets available which can be realised at short notice and at minimal cost. With the exception of investments in private equity and infrastructure partnerships, there are no commitments to contribute further capital to any of the existing Fund investments. When private equity and infrastructure partnership capital calls are received, payments are made from cash or, if there are insufficient cash funds available, other assets are realised.
21.Events after the end of the Reporting Period There were no events after the end of the reporting period.
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Teesside Pension Fund Statement of the Actuary for the year ended 31 March 2015
Introduction The Scheme Regulations require that a full actuarial valuation is carried out every third year. The purpose of this is to establish that the Teesside Pension Fund (the Fund) is able to meet its liabilities to past and present contributors and to review employer contribution rates. The last full actuarial investigation into the financial position of the Fund was completed as at 31 March 2013 by Aon Hewitt Limited, in accordance with Regulation 36 of the Local Government Pension Scheme (Administration) Regulations 2008. Actuarial Position 1. The valuation as at 31 March 2013 showed that the funding ratio of the Fund had increased since the previous valuation with the market value of the Fund’s assets at that date (of £2,956.3M) covering 101% of the liabilities in respect of service prior to the valuation date allowing, in the case of current contributors to the Fund, for future increases in pensionable pay. 2. The valuation also showed that the aggregate level of contributions required to be paid by participating employers with effect from 1 April 2014 was: 14.4% of pensionable pay. This is the rate calculated as being sufficient, together with contributions paid by members, to meet the liabilities arising in respect of service after the valuation date. Less 0.9% of pensionable pay to restore the assets to 100% of the liabilities in respect of service prior to the valuation date over a recovery period of 11 years from 1 April 2014. 3. In practice, each individual employer's position is assessed separately and contributions are set out in Aon Hewitt Limited's report dated 31 March 2014 (the "actuarial valuation report"). In addition to the contributions shown above, payments to cover additional liabilities arising from early retirements (other than ill-health retirements) will be made to the Fund by the employers. 4. The funding plan adopted in assessing the contributions for each individual employer is in accordance with the Funding Strategy Statement in force at the time. The approach adopted, and the recovery period used for each employer, is set out in the actuarial valuation report. 5. The valuation was carried out using the projected unit actuarial method for most employers and the main actuarial assumptions used for assessing the funding target and the contribution rates were as follows.
Discount rate 5.4% p.a.
Rate of pay increases 3.9% p.a.
Rate of increase to pension accounts 2.4% p.a. Rate of increases in pensions in payment 2.4% p.a. (in excess of Guaranteed Minimum Pension)
The assets were valued at market value. Further details of the assumptions adopted for the valuation were set out in the actuarial valuation report. 6. The valuation results summarised above are based on the financial position and market levels at the valuation date, 31 March 2013. As such the results do not make allowance for changes which have occurred subsequent to the valuation date.
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7. The formal actuarial valuation report and the Rates and Adjustments Certificate setting out the employer contribution rates for the period from 1 April 2014 to 31 March 2017 were signed on 31 March 2014. Contribution rates will be reviewed at the next actuarial valuation of the Fund as at 31 March 2016 in accordance with Regulation 62 of the Local Government Pension Scheme Regulations 2013. 8. This Statement has been prepared by the current Actuary to the Fund, Aon Hewitt Limited, for inclusion in the accounts of the Fund. It provides a summary of the results of their actuarial valuation which was carried out as at 31 March 2013. The valuation provides a snapshot of the funding position at the valuation date and is used to assess the future level of contributions required. This Statement must not be considered without reference to the formal actuarial valuation report which details fully the context and limitations of the actuarial valuation. Aon Hewitt Limited does not accept any responsibility or liability to any party other than our client, Middlesbrough Borough Council, the Administering Authority of the Fund, in respect of this Statement. 9. The report on the actuarial valuation as at 31 March 2013 is available on the Fund’s website at the following address: http://www.teespen.org.uk/documents/content/pdf/Valuation/Valuation_2013.pdf
Aon Hewitt Limited May 2015
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The Compliance Statement
Changes to the Local Government Pension Scheme Regulations From April 2014 the Fund was governed by the following regulations;
The Local Government Pension Scheme (Benefits, Membership and Contributions) Regulations 2007 The Local Government Pension Scheme (Administration) Regulations 2008, and The Local Government Pension Scheme (Transitional Provisions) Regulations 2008 The Local Government Pension Scheme (Transitional Provisions, Savings and Amendment) Regulations 2014. The new regulations have made significant changes to the scheme. Full details of the changes to the scheme, along with updated scheme guides, are on our website at www.teespen.org.uk .
Statement of Investment Principles
The Local Government Pension Scheme (Management and Investment of Funds)(Amendment) Regulations 1999 require that Local Government Pension Scheme’s administering authorities prepare, publish and maintain Statements of Investment Principles (SIP). The current version of the Teesside Pension Fund SIP was approved in March 2015 and contains statements on;
1. Investment responsibilities 2. The Myners Principles 3. Types of investments to be held 4. The balance between different types of investment 5. Risk 6. Investment Objective 7. The realisation of investments 8. Fund Investment Strategy: Ethical, Social and Environmental Perspective 9. Shareholder Governance 10. Performance Measurement 11. Compliance and Monitoring
The statement is maintained and published by Middlesbrough Council, copies of which are available on application, or it can be seen at the Fund’s website at http://www.teespen.org.uk/documents/index.php?name=SIP
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The Funding Strategy Statement
The Local Government Pension Scheme (Amendment) Regulations 2013 established the requirement for each Administering Authority to produce a Funding Strategy Statement setting out a long term view on funding liabilities. The main areas covered by the statement are; 1. The purpose of the Statement 2. The aim and purpose of the Fund 3. The responsibilities of the key parties 4. The solvency of the Fund 5. The identification of risks to the Fund 6. The links to the Statement of Investment Principles 7. Future Monitoring
The latest Funding Strategy Statement was approved by the Pensions Panel and was effective from March 2015 and can be seen at http://www.teespen.org.uk/documents/index.php?name=FSS
Governance Policy Under the Local Government Pension Scheme (amendment) (No.2) Regulations 2005 Middlesbrough Council, the Administering Authority to the Teesside Pension Fund, has drawn up a Governance Policy which sets out the procedures for the governance of the Fund, with the main areas covered being: 1. Frequency of meetings 2. Structure of the meetings 3. Membership 4. Principles of governance The current policy document can be viewed at http://www.teespen.org.uk/documents/index.php?name=GOVERNANCE
Communications Policy The Teesside Pension Fund actively seeks to communicate with all of its stakeholders, including the members, the employers and other external organisations. For example we have been providing every active member of the scheme with a statement of accrued benefits since 2001, well before it became compulsory to do so. The statement of accrued benefits also includes the member’s State Pension Forecast to aid in their financial planning. We also provide newsletters twice a year to all our active and pensioner members, this allows us to inform you of any scheme changes which may made. A Communications Policy Statement has been drawn up in order to ensure that the Fund offers clear communication to stakeholders of the Local Government Pension Scheme.
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The latest policy statement can be seen at http://www.teespen.org.uk/documents/index.php?name=COMMUNICATION_FORM
Myners Investment Principles : Compliance Statement
The LGPS (Management & Investment of Funds) Regulations require that Funds comply with the Myners Investment Principles or explain non-compliance.
The Fund’s position is:
Principle 1: Effective decision-making.
Trustees should ensure that decisions are taken by persons or organisations with the skills, knowledge, advice and resources necessary to take them effectively and monitor their implementation. Trustees should have sufficient expertise to be able to evaluate and challenge the advice they receive, and manage conflicts of interest.
☺ Full Compliance
Principle 2: Clear Objectives
Trustees should set out an overall investment objective for the Fund that takes account of the scheme’s liabilities, the strength of the sponsor covenant, as well as the attitude to risk of both the trustees and the scheme sponsor, and clearly communicate these to advisors and investment managers.
☺ Full Compliance
Principle 3: Risks and Liabilities
In setting and reviewing their investment strategy, trustees should take account of the form and structure of the Fund’s liabilities. These include the strength of the sponsor covenant, the risk of sponsor default and longevity risk.
☺ Full Compliance
Principle 4: Performance assessment
Trustees should arrange for the formal measurement of the performance of the investments, investment managers and advisors. Trustees should also periodically make a formal policy assessment of their own effectiveness as a decision-making body and report on this to scheme members.
☺ Full Compliance
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Principle 5: Responsible ownership
Trustees should adopt, or ensure that their investment managers adopt, the Institutional Shareholders’ Committee Statement of Principles on the responsibilities of shareholders and agents. A statement of the scheme’s policy on responsible ownership should be included in the Statement of Investment Principles. Trustees should report periodically to members on the discharge of such responsibilities.
☺ Full Compliance
Principle 6: Transparency and Reporting
Trustees should act in a transparent manner, communicating with stakeholders on issues relating to their management of investment, its governance and risks, including performance against stated objectives. Trustees should provide regular communication to scheme members in the form they consider most appropriate.
☺ Full Compliance
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Summary of LGPS benefits and comparison to previous scheme
LGPS 2014 LGPS 2008
Career Average Revalued Earnings Basis of Pension Final Salary (CARE)
Accrual Rate 1/49th 1/60th
Revaluation Rate Consumer Prices Index (CPI) Based on Final Salary
Pay including non -contractual overtime Pay excluding non -contractual overtime Pensionable Pay and additional hours and non-pensionable additional hours
2015/2016 Member Contribution Table - 2013/2014 Member Contribution Table From 1 April 201 4
Pay Bands Contribution Rates Pay Bands Contribution Rates
Up to £13, 700 5.5% Up to £13,500 5.5%
£13,7 01 - £16,100 5.8% £13,501 - £21,000 5.8%
£16,101 - £20,800 5.9 % £21,001 - £34,000 6.5%
Employee £20,801 - £34,700 6.5 % Contribution £34,001 - £43,000 6.8% Rates £34,701 - £46,500 6.8 % £43,001 - £60,0 00 8.5%
£46,501 - £87,100 7.2 % £60,001 - £85,000 9.9%
Over £87,100 7.5 % £85,001 - £100,000 10.5%
£100,001 - £150,000 11.4%
Over £150,000 12.5%
Yes, members can pay 50% Contribution contributions for 50% of the pension No Flexibility benefit
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Normal Pension Equal to the individual member's State 65 Age Pension Age
Lump Sum Trade Trade £1 of pension for £12 lump sum Trade £1 of pension for £12 lump sum Off
Death in Service 3 x Pensionable Pay 3 x Pensionable Pay Lump Sum
Death in Service 1/160th accrual based on Tier 1 ill 1/160th accrual based on Tier 1 ill health Survivor Benefits health pension enhancement pension enhancement
Tier 1 - Immediate payment with Tier 1 - Immediate payment with service service enhanced to Normal Pension enhanced to Normal Pension Age (65) Age Tier 2 - Immediate payment with 25% Ill Health Tier 2 - Immediate payment with 25% service enhancement to Normal Pension Provision service enhancement to Normal Age (65) Pension Age Tier 3 - Temporary payment of pension Tier 3 - Temporary payment of pension for up to 3 years for up to 3 years
Indexation of Pension in CPI CPI (RPI for pre-2011 increases) Payment
Vesting Period 2 years 3 months
Pension Increases
Public service pensions are increased under the provisions of the Pensions (Increase) Act 1971 and Section 59 of the Social Security Pensions Act 1975. With effect from April 2011 increases are based on the Consumer Price Index for September each year and are paid the following year from the first Monday in the new financial year. Pensions awarded after the date of the last increase receive an apportioned increase related to the date the pension began. All pensions are subject to the increase with the exception of those pensions awarded on redundancy where the member is under the age of 55 years. These pensions are subject to increase (including backdating) from the member’s 55 th birthday.
The following table shows the rate of pension increases that have applied during the last 10 years.
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From April Increase % 2002 1.7% 2003 1.7% 2004 2.8% 2005 3.1% 2006 2.7% 2007 3.6% 2008 3.9% 2009 5.0% 2010 0.0% 2011 3.1% 2012 5.2 % 2013 2.2% 2014 2.7%
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Contacts and further information
Contacts
Pensions Unit Mouchel Pensions Unit Teesside Pension Fund For General and Benefit Entitlement PO Box 340 enquiries Middlesbrough TS1 2XP
Telephone: (01642) 727777 E Mail: [email protected]
Pensions Manager Mike Hopwood
Telephone: (01642) 727778 E Mail: [email protected]
Head of Investments Paul Campbell
Telephone: (01642) 729024 E Mail: [email protected]
Teesside Pension Fund Web www.teespen.org.uk Site
Employers Web Site www.employers.teespen.org.uk
Further Information
For more information on this Jan Oliver report please contact: Pensions Accountant
Telephone: (01642) 729617 E Mail: jan_oliver@ Middlesbrough.gov.uk Further copies of this report Mouchel Pensions Unit can be obtained from: Teesside Pension Fund PO Box 340 Middlesbrough TS1 2XP
Telephone: (01642) 727777 E Mail: [email protected]
A copy of this report, and those for previous years, is available on our web site at www.teespen.org.uk
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